Xenith Bankshares, Inc. - FORM 10-Q

Xenith Bankshares, Inc. - FORM 10-Q - May 16, 2011

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EX-3.1 - AMENDED AND RESTATED ARTICLES OF INCORPORATION - Xenith Bankshares, Inc.	dex31.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Xenith Bankshares, Inc.	dex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - Xenith Bankshares, Inc.	dex311.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - Xenith Bankshares, Inc.	dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

Commission File Number: 001-32968

HAMPTON ROADS BANKSHARES, INC.

(Exact name of registrant as specified in its charter)


Virginia				54-2053718
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

999 Waterside Drive, Suite 200, Norfolk, Virginia				23510
(Address of principal executive offices)				(Zip Code)

(757) 217-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the issuer’s common stock as of April 30, 2011 was 33,389,949 shares, par value $0.01.

TABLE OF CONTENTS


	Page
PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Consolidated Balance Sheets		3

March 31, 2011
December 31, 2010

Consolidated Statements of Operations		4

Three months ended March 31, 2011 and 2010

Consolidated Statement of Changes in Shareholders’ Equity		5

Three months ended March 31, 2011

Consolidated Statements of Cash Flows		6

Three months ended March 31, 2011 and 2010

Notes to Consolidated Financial Statements		8

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		34

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		46

ITEM 4 – CONTROLS AND PROCEDURES		47

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS		48

ITEM 1A – RISK FACTORS		48

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		53

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES		53

ITEM 4 – REMOVED AND RESERVED		53

ITEM 5 – OTHER INFORMATION		53

ITEM 6 – EXHIBITS		53

SIGNATURES		55

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM I. Financial Statements

CONSOLIDATED BALANCE SHEETS


	(Unaudited)
(in thousands, except share and per share data)	March 31, 2011			December 31, 2010
Assets:
Cash and due from banks	$	18,921		$	17,726
Interest-bearing deposits in other banks		1,786			2,342
Overnight funds sold and due from Federal Reserve Bank		352,070			440,844
Investment securities available for sale, at fair value		349,258			334,237
Restricted equity securities, at cost		24,009			24,363

Loans held for sale		12,161			22,499

Loans		1,806,447			1,958,767
Allowance for loan losses		(109,990	)		(157,253	)

Net loans		1,696,457			1,801,514
Premises and equipment, net		92,533			93,414
Interest receivable		7,540			7,278
Foreclosed real estate and repossessed assets, net of valuation allowance		70,790			59,423
Intangible assets, net		10,371			10,858
Bank-owned life insurance		50,693			50,213
Other assets		30,794			35,445

Totals assets	$	2,717,383		$	2,900,156


Liabilities and Shareholders’ Equity:
Deposits
Noninterest-bearing demand	$	223,764		$	224,440
Interest-bearing:
Demand		646,902			725,816
Savings		67,902			65,620
Time deposits:
Less than $100		679,975			703,006
$100 or more		652,459			701,279

Total deposits		2,271,002			2,420,161
Federal Home Loan Bank borrowings		212,559			213,353
Other borrowings		50,003			49,853
Interest payable		3,729			3,644
Other liabilities		20,227			22,350

Total liabilities		2,557,520			2,709,361

Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; 1,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 33,389,949 shares issued and outstanding on March 31, 2011 and on December 31, 2010 ⁽¹⁾		334			334
Capital surplus		477,415			477,385
Retained deficit		(319,349	)		(287,681	)
Accumulated other comprehensive income, net of tax		1,434			345

Total shareholders’ equity before non-controlling interest		159,834			190,383
Non-controlling interest		29			412

Total shareholders’ equity		159,863			190,795

Total liabilities and shareholders’ equity	$	2,717,383		$	2,900,156

See accompanying notes to the consolidated financial statements.

⁽¹⁾	As restated to give retroactive effect to the 1 for 25 shares reserve stock split which occurred on April 27, 2011.

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except share and per share data)	Three Months Ended
				As Restated
(unaudited)	March 31, 2011			March 31, 2010
Interest Income:
Loans, including fees	$	24,539		$	32,254
Investment securities		2,418			1,717
Overnight funds sold		225			95
Interest-bearing deposits in other banks		1			29

Total interest income		27,183			34,095

Interest Expense:
Deposits:
Demand		1,165			3,801
Savings		42			129
Time deposits:
Less than $100		2,904			3,950
$100 or more		2,787			2,238

Interest on deposits		6,898			10,118
Federal Home Loan Bank borrowings		1,320			1,313
Other borrowings		741			731

Total interest expense		8,959			12,162


Net interest income		18,224			21,933
Provision for loan losses		21,314			45,613

Net interest expense after provision for loan losses		(3,090	)		(23,680	)

Noninterest Income:
Service charges on deposit accounts		1,446			1,665
Mortgage banking revenue		1,250			1,755
Gain on sale of investment securities available for sale		—			79
Gain on sale of premises and equipment		—			25
Losses on foreclosed real estate and repossessed assets		(3,682	)		(738	)
Other-than-temporary impairment of securities (includes total other-than-temporary impairment losses of $0 and $234, net of $0 and $190 recognized in other comprehensive income for the three months ended March 31, 2011 and 2010, respectively, before taxes)		—			(44	)
Insurance revenue		1,153			1,320
Brokerage revenue		70			74
Income from bank-owned life insurance		481			400
Other		1,407			1,065

Total noninterest income		2,125			5,601

Noninterest Expense:
Salaries and employee benefits		12,355			9,750
FDIC insurance		6,709			1,056
Occupancy		2,326			2,298
Professional fees and consultants		2,185			1,316
Problem loan and repossessed asset costs		1,416			613
Data processing		1,007			1,480
Equipment		806			1,091
Other		3,838			3,376

Total noninterest expense		30,642			20,980

Loss before provision for income taxes		(31,607	)		(39,059	)
Provision for income taxes		44			62

Net loss		(31,651	)		(39,121	)
Net income attributable to non-controlling interest		17			—

Net loss attributable to Hampton Roads Bankshares, Inc.		(31,668	)		(39,121	)
Preferred stock dividend and accretion of discount		—			1,375

Net loss available to common shareholders	$	(31,668	)	$	(40,496	)


Per Share: ⁽¹⁾
Cash dividends declared	$	—		$	—

Basic loss	$	(0.95	)	$	(45.74	)

Diluted loss	$	(0.95	)	$	(45.74	)

Basic weighted average shares outstanding		33,389,949			885,344
Effect of dilutive stock options		—			—

Diluted weighted average shares outstanding		33,389,949			885,344

See accompanying notes to the consolidated financial statements.

⁽¹⁾	As restated to give retroactive effect to the 1 for 25 shares reserve stock split which occurred on April 27, 2011.

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY


(in thousands, except share data)	Common Stock						Retained			Non-controlling			Accumulated Other Comprehensive		Total Shareholders’
(unaudited)	Shares		Amount		Capital Surplus		Deficit			Interest			Income (Loss)		Equity
Balance at December 31, 2010⁽¹⁾		33,389,949	$	334	$	477,385	$	(287,681	)	$	412		$	345	$	190,795

Comprehensive income:
Net loss		—		—		—		(31,668	)		17			—		(31,651	)
Change in unrealized gain on securities available for sale		—		—		—		—			—			1,089		1,089

Total comprehensive loss																(30,562	)
Stock-based compensation expense		—		—		30		—			—			—		30
Distributed non-controlling interest		—		—		—		—			(400	)		—		(400	)


Balance at March 31, 2011		33,389,949	$	334	$	477,415	$	(319,349	)	$	29		$	1,434	$	159,863

See accompanying notes to the consolidated financial statements.

⁽¹⁾	As restated to give retroactive effect to the 1 for 25 shares reverse stock split which occurred on April 27, 2011.

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)	Three Months Ended
				As Restated
(unaudited)	March 31, 2011			March 31, 2010
Operating Activities:
Net loss	$	(31,651	)	$	(39,121	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,171			1,333
Amortization of intangible assets and fair value adjustments		(33	)		(4	)
Provision for loan losses		21,314			45,613
Proceeds from mortgage loans held for sale		101,900			63,232
Originations of mortgage loans held for sale		(91,562	)		(66,534	)
Stock-based compensation expense		30			111
Net amortization of premiums and accretion of discounts on investment securities		711			316
Gain on sale of premises and equipment		—			(25	)
Losses on foreclosed real estate and repossessed assets		3,682			738
Gain on sale of investment securities available for sale		—			(79	)
Earnings on bank-owned life insurance		(481	)		(400	)
Other-than-temporary impairment of securities		—			44
Changes in deferred taxes		—			(235	)
Changes in:
Interest receivable		(262	)		(683	)
Other assets		4,652			1,097
Interest payable		85			(69	)
Other liabilities		(2,123	)		(3,812	)

Net cash provided by operating activities		7,433			1,522

Investing Activities:
Proceeds from maturities and calls of debt securities available for sale		14,242			5,540
Proceeds from sale of investment securities available for sale		—			767
Purchase of investment securities available for sale		(28,887	)		(22,591	)
Proceeds from sale of restricted equity securities		354			—
Net decrease in loans		59,341			30,555
Purchase of premises and equipment		(260	)		(97	)
Proceeds from sale of foreclosed real estate		9,127			1,120
Proceeds from sale of premises and equipment		—			34

Net cash provided by investing activities		53,917			15,328

Financing Activities:
Net increase (decrease) in deposits		(149,069	)		70,374
Repayments of Federal Home Loan Bank borrowings		(16	)		(1,516	)
Distributed non-controlling interest		(400	)		—
Preferred stock dividends paid and amortization of preferred stock discount		—			270

Net cash provided by (used in) financing activities		(149,485	)		69,128

Increase (decrease) in cash and cash equivalents		(88,135	)		85,978
Cash and cash equivalents at beginning of period		460,912			200,044

Cash and cash equivalents at end of period	$	372,777		$	286,022

HAMPTON ROADS BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	March 31, 2011		March 31, 2010
Supplemental cash flow information:
Cash paid for interest	$	8,874	$	12,232
Cash paid for income taxes		20		—

Supplemental non-cash information:
Change in unrealized gain on securities	$	1,089	$	1,837
Transfer between loans and other real estate owned		24,176		18,277

See accompanying notes to the consolidated financial statements.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hampton Roads Bankshares, Inc. (the “Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010. On September 28, 2010, the holders of the Company’s common stock, par value $0.01 per share (the “Common Stock”), approved an amendment to the Company’s Amended and Restated Articles of Incorporation (the “Articles”) to effect a reverse stock split of the Common Stock. The shareholders granted the Company’s Board of Directors the discretion to determine the appropriate timing and ratio of the reverse stock split.

On March 18, 2011, the Board of Directors of the Company unanimously adopted resolutions approving an amendment to the Articles to effect a 1-for-25 reverse stock split of all outstanding shares of the Common Stock, effective at 11:59 p.m., Eastern Daylight Time, on April 27, 2011 (the “Reverse Stock Split”). Shareholders received one new share of Common Stock in replacement of every twenty-five shares they held on that date. The Reverse Stock Split did not change the aggregate value of any stockholder’s shares of Common Stock or any stockholder’s ownership percentage of the Common Stock, except for minimal changes resulting from the treatment of fractional shares. The Company did not issue any fractional shares as a result of the Reverse Stock Split. The number of shares issued to each stockholder was rounded up to the nearest whole number if, as a result of the Reverse Stock Split, the number of shares owned by any stockholder would not be a whole number. All previously reported share and per share amounts in the accompanying consolidated financial statements and related notes have been restated to reflect the reverse stock split.

Recent Accounting Pronouncements

In January 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-01, Receivables, that temporarily delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20, Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, until the guidance for determining what constitutes a troubled debt restructuring is determined. The guidance is anticipated to be effective for interim and annual periods after June 15, 2011. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements but will likely result in additional disclosures.

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310), that defines Troubled Debt Restructurings. In turn, the effective date of the disclosures about troubled debt restructurings in ASU 2010-20, Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, is effective for interim and annual periods beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements but will likely result in additional disclosures.

NOTE B – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Subsequent to filing the Company’s quarterly report on Form 10-Q for the three months ended March 31, 2010, the Company determined that a valuation allowance on its deferred tax assets should be recognized as of December 31, 2009. The Company decided to establish a valuation allowance against the deferred tax asset because it is uncertain when it will realize this asset.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accordingly, the March 31, 2010 consolidated financial statements were restated to account for this determination. The effect of this change (in thousands, except per share amounts) in the consolidated financial statements was as follows.


Consolidated Balance Sheet at March 31, 2010

	As Reported			Adjustment			As Restated

Deferred tax assets, net	$	70,323		$	(70,323	)	$	—
Total assets		3,016,470			(70,323	)		2,946,147
Retained earnings deficit		(158,621	)		(70,323	)		(228,944	)
Total shareholders’ equity		156,509			(70,323	)		86,186
Total liabilities and shareholders’ equity		3,016,470			(70,323	)		2,946,147

Consolidated Statement of Operations for the three months ended March 31, 2010

	As Reported			Adjustment			As Restated

Provision for income taxes	$	(14,279	)	$	14,341		$	62
Net loss		(24,780	)		(14,341	)		(39,121	)
Net loss available to common shareholders		(26,155	)		(14,341	)		(40,496	)

Loss per share - basic		(29.54	)		(16.20	)		(45.74	)
Loss per share - diluted		(29.54	)		(16.20	)		(45.74	)

Consolidated Statement of Cash Flows for the three months ended March 31, 2010

	As Reported			Adjustment			As Restated
Operating Activities:
Net loss	$	(24,780	)	$	(14,341	)	$	(39,121	)
Deferred tax asset valuation allowance		—			14,341			14,341

NOTE C – REGULATORY MATTERS

Effective June 17, 2010, the Company and its banking subsidiary, Bank of Hampton Roads (“BOHR”), entered into a written agreement (herein called the “Written Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) and the Bureau of Financial Institutions of the Virginia State Corporation Commission (“Bureau of Financial Institutions”). The Company’s other banking subsidiary, Shore Bank (“Shore”), is not a party to the Written Agreement.

Written Agreement

Under the terms of the Written Agreement, BOHR agreed to develop and submit for approval, within the time periods specified, plans to (a) strengthen board oversight of management and BOHR’s operations, (b) strengthen credit risk management policies, (c) improve BOHR’s position with respect to loans, relationships, or other assets in excess of $2.5 million which are now, or may in the future become, past due more than 90 days, are on BOHR’s problem loan list, or adversely classified in any report of examination of BOHR, (d) review and revise, as

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

appropriate, current policy and maintain sound processes for determining, documenting, and recording an adequate allowance for loan and lease losses, (e) improve management of BOHR’s liquidity position and funds management policies, (f) provide contingency planning that accounts for adverse scenarios and identifies and quantifies available sources of liquidity for each scenario, (g) reduce BOHR’s reliance on brokered deposits, and (h) improve BOHR’s earnings and overall condition.

In addition, BOHR has agreed that it will (a) not extend, renew, or restructure any credit that has been criticized by the FRB or the Bureau of Financial Institutions absent prior board of directors approval in accordance with the restrictions in the Written Agreement, (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the FRB, (c) comply with legal and regulatory limitations on indemnification payments and severance payments, and (d) appoint a committee to monitor compliance with the terms of the Written Agreement.

In addition, the Company has agreed that it will (a) not take any other form of payment representing a reduction in BOHR’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval, (b) take all necessary steps to correct certain technical violations of law and regulation cited by the FRB, (c) refrain from guaranteeing any debt without the prior written approval of the FRB and the Bureau of Financial Institutions, and (d) refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB or the Bureau of Financial Institutions.

Under the terms of the Written Agreement, both the Company and BOHR agreed to submit for approval capital plans to maintain sufficient capital at the Company, on a consolidated basis, and to refrain from declaring or paying dividends absent prior regulatory approval.

To date, the Company and BOHR have met all of the deadlines for taking actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement. A committee (the “Risk Committee”) has been appointed to oversee the Company’s compliance with the terms of the agreement and has met each month to review compliance. Written plans have been submitted for strengthening board oversight, strengthening credit risk management practices, improving liquidity, reducing the reliance on brokered deposits, improving capital, and curing the technical violations of laws and regulations. The Company has also submitted its written policies and procedures for maintaining an adequate allowance for loan and lease losses and its plans for all foreclosed real estate and nonaccrual and delinquent loans in excess of $2.5 million. Additionally, the Company instituted the required review process for all classified loans. The Company has charged off the assets identified as loss from the previous examination. Moreover, the Company raised $295.0 million in the closings of several related transactions in the third and fourth quarters of last year. The Company and BOHR were “well capitalized” as of March 31, 2011. As a result, management believes the Company and BOHR are in full compliance with the terms of the Written Agreement.

NOTE D – STOCK-BASED COMPENSATION

Compensation cost relating to stock-based transactions is accounted for in the consolidated financial statements based on the fair value of the share-based award on the date of grant. The Company calculates the fair value of its stock options at the date of grant using a lattice option pricing model. Stock options granted with pro-rata vesting schedules are expensed over the vesting period on a straight-line basis.

Stock-based compensation expense (in thousands, except share data) recognized in the consolidated statements of operations and the options exercised, including the total intrinsic value and cash received, for the three months ended March 31, 2011 and 2010 were as follows.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	March 31,
	2011		2010
Expense recognized:
Related to stock options	$	22	$	31
Related to share awards		8		80
Related tax benefit		—		—

Number of options exercised:
New shares		—		—
Previously acquired shares		—		—

Total intrinsic value of options exercised	$	—	$	—
Cash received from options exercised		—		—

The Company has granted stock options to its directors and employees under stock compensation plans that have been approved by the Company’s shareholders. All outstanding options have terms that range from five to ten years and are either fully vested and exercisable at the date of grant or vest ratably over periods that range from three to ten years. A summary of the Company’s stock option activity and related information for the three months ended March 31, 2011 is as follows.


				Weighted		Average
	Options			Average		Intrinsic
	Outstanding			Exercise Price		Value
Balance at December 31, 2010		46,853		$	326.00		—
Expired		(1,664	)		223.96		—

Balance at March 31, 2011		45,189		$	329.82	$	—


Options exercisable at March 31, 2011		43,712		$	326.17	$	—

Information pertaining to options outstanding and options exercisable as of March 31, 2011 is as follows.


	Options Oustanding						Options Exercisable
Ranges of Exercise Prices	Number of Options Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number of Options Exercisable		Weighted Average Exercise Price
$77.25 - $126.25		2,110		1.47	$	103.89		2,110	$	103.89
$175.75 - $219.25		6,433		2.04		197.39		6,433		197.39
$227.75 - $266.25		14,511		2.56		243.57		14,511		243.57
$300.00 - $312.25		6,865		5.83		300.88		6,225		300.97
$485.75 - $551.75		13,722		3.95		500.55		12,885		497.79
$591.75 - $616.75		1,548		4.24		611.49		1,548		611.49

$77.25 - $616.75		45,189		3.41	$	329.82		43,712	$	326.17

The Company may issue new shares to satisfy stock option grants. As of March 31, 2011, there were 30,136 shares available under the existing stock incentive plans. Shares may be repurchased in the open market or, under certain circumstances, through privately negotiated transactions. As of March 31, 2011, there was $173 thousand of unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 3.3 years.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has granted non-vested shares of Common Stock to certain directors and employees as part of incentive programs. Outstanding non-vested shares have vesting schedules of five years and are expensed over the same time frame. A summary of the Company’s non-vested share activity and related information for the three months ended March 31, 2011 is as follows.


	Number of Shares			Per Share Weighted-Average Grant-Date Fair Value
Balance at December 31, 2010		320		$	262.75
Vested		(40	)		219.25

Balance at March 31, 2011		280		$	268.96

As of March 31, 2011, there was $64 thousand of total unrecognized compensation cost related to non-vested share awards. That cost is expected to be recognized over a weighted-average period of 2.1 years. The total fair value of shares vested during the three months ended March 31, 2011 was $690.

NOTE E – INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities (in thousands) available for sale at March 31, 2011 and December 31, 2010 were as follows.


	March 31, 2011
Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

Agency securities	$	95,371	$	482	$	1,361	$	94,492
Mortgage-backed securities		250,286		3,571		1,247		252,610
Equity securities		2,112		90		46		2,156

Total investment securities available for sale	$	347,769	$	4,143	$	2,654	$	349,258


	December 31, 2010
Description of Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

Agency securities	$	89,849	$	371	$	1,518	$	88,702
Mortgage-backed securities		241,970		3,115		1,737		243,348
Equity securities		2,101		127		41		2,187

Total investment securities available for sale	$	333,920	$	3,613	$	3,296	$	334,237

The amortized cost and estimated fair value of investment securities available for sale (in thousands) that are not determined to be other-than-temporarily impaired by contractual maturity at March 31, 2011 and December 31, 2010 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities do not have contractual maturities.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	March 31, 2011
	Amortized Cost		Estimated Fair Value

Due after one year but less than five years	$	4,798	$	4,994
Due after five years but less than ten years		41,289		40,790
Due after ten years		299,570		301,318
Equity securities		2,112		2,156


Total available-for-sale securities	$	347,769	$	349,258


	December 31, 2010
	Amortized Cost		Estimated Fair Value

Due after one year but less than five years	$	5,670	$	5,884
Due after five years but less than ten years		35,222		34,688
Due after ten years		290,927		291,478
Equity securities		2,101		2,187


Total available-for-sale securities	$	333,920	$	334,237

Information pertaining to securities with gross unrealized losses (in thousands) at March 31, 2011 and December 31, 2010, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position is as follows.


	March 31, 2011
	Less than 12 Months				12 Months or More				Total
Description of Securities	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss

Agency securities	$	54,336	$	1,361	$	—	$	—	$	54,336	$	1,361
Mortgage-backed securities		78,823		1,247		—		—		78,823		1,247
Equity securities		53		4		91		42		144		46

	$	133,212	$	2,612	$	91	$	42	$	133,303	$	2,654


	December 31, 2010
	Less than 12 Months				12 Months or More				Total
Description of Securities	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss

Agency securities	$	4,758	$	1,518	$	—	$	—	$	4,758	$	1,518
Mortgage-backed securities		71,057		1,737		—		—		71,057		1,737
Equity securities		121		1		93		40		214		41

	$	75,936	$	3,256	$	93	$	40	$	76,029	$	3,296

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI, management considers many factors including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or is it more likely than not that it will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss. If an entity intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The unrealized loss positions on debt securities at March 31, 2011 were considered to be directly related to interest rate movements as there is minimal credit risk exposure in these investments. At March 31, 2011, 25 mortgage-backed and 14 agency securities were in an unrealized loss position. Management does not believe that these debt securities were other-than-temporarily impaired at March 31, 2011.

Our impairment analysis considered all available evidence including the length of time and the extent to which the market value of each security was less than cost, the financial condition of the issuer of each equity security (based upon financial statements of the issuers), and the near term prospects of each issuer, as well as our intent and ability to retain these investments for a sufficient period of time to allow for any anticipated recovery in their respective market values. During the first three months of 2011, no securities were determined to be other-than-temporarily impaired. During the first three months of 2010, equity securities with an amortized cost basis of $91 thousand were determined to be other-than-temporarily impaired. Impairment losses of $44 thousand were recognized through noninterest income during the first three months of 2010. An additional $190 thousand was included in accumulated other comprehensive loss in the equity section of the balance sheet as of March 31, 2010. Management has evaluated the unrealized losses associated with the remaining equity securities as of March 31, 2011 and, in management’s opinion, the unrealized losses are temporary, and it is our intention to hold these securities until their value recovers. A rollforward of the cumulative other-than-temporary impairment losses (in thousands) recognized in earnings for all securities for the three months ended March 31, 2011 is as follows.


December 31, 2010	$	719
Less: Realized gains for securities sales		—
Add: Loss where impairment was not previously recognized		—
Add: Loss where impairment was previously recognized		—

March 31, 2011	$	719

The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $17.6 million at March 31, 2011. FHLB stock is generally viewed as a long-term investment. As a restricted investment security, it is carried at cost as there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The FHLB has reinstated dividends and the repurchase of its stock thereby improving the value. The Company does not consider this investment to be other-than-temporarily impaired at March 31, 2011, and no impairment has been recognized.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE F – ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER

Acquired loans are recorded at fair value at time of acquisition with no valuation allowance. Accreted yield is limited to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments.

Loans that were acquired for which there was evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be made as scheduled had an outstanding balance of $18.4 million and a carrying amount of $16.3 million at March 31, 2011. The carrying amount of these loans is included in the balance sheet amount of loans receivable at March 31, 2011. Of these loans, $11.1 million have experienced further deterioration since the acquisition date and are included in the impaired loan amounts disclosed in Note G, Loans. The following table depicts the accretable yield (in thousands) at the beginning and end of the period.


	Accretable Yield

Balance, December 31, 2010	$	549
Accretion		(55	)
Disposals		(11	)
Additions		1

Balance, March 31, 2011	$	484

NOTE G - LOANS

The Company grants commercial, real estate, and consumer loans to customers throughout its lending areas and historically granted new loans to finance construction and land development. The major segments of loans (in thousands) are summarized as follows.


	March 31, 2011			December 31, 2010

Commercial and Industrial	$	270,682		$	304,550
Construction		395,228			475,284
Real estate - commercial mortgage		630,403			658,969
Real estate - residential mortgage		472,042			487,559
Installment loans		38,239			32,708
Deferred loan fees and related costs		(147	)		(303	)


Total loans	$	1,806,447		$	1,958,767

Allowance for Loan Losses Related to Loans

The purpose of the allowance for loan losses is to provide for potential losses inherent in our loan portfolio. Management considers several factors in determining the allowance for loan losses, including historical loan loss experience, the size and composition of the portfolio, and the estimated value of collateral agreements. Management regularly reviews the loan portfolio to determine whether adjustments are necessary to maintain an allowance for loan losses sufficient to absorb losses. Our review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay. Some of the tools used in the credit review process to identify potential problem loans include past due reports, collateral valuations (primarily third-party agreements), cash flow analyses of borrowers, and risk ratings of loans. In addition to the review of credit quality through ongoing credit review processes, we perform a comprehensive allowance analysis for our loan portfolio at least quarterly. This

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

analysis includes specific allowances for individual loans, general allowances for loan pools which factor in our historical loan loss experience, loan portfolio growth and trends, economic conditions, and unallocated allowances predicated upon both internal and external factors.

As part of the loan loss reserve methodology, loans are categorized into one of five broad segments: commercial, construction, commercial real estate, residential real estate, and consumer installment. Loss factors are calculated using qualitative data and then are applied to each of the loan segments to determine a reserve level for various subsets of each of the five segments of loans. In addition, special allocations may be assigned to nonaccrual or other problem credits.

A rollforward of the activity (in thousands) within the allowance for loan losses by loan type and recorded investment in loans for the quarter ended March 31, 2011 is as follows.


	Commercial and Industrial			Construction			Real Estate -						Installment			Unallocated			Total
	Commercial and Industrial			Construction			Commercial Mortgage			Residential Mortgage			Installment			Unallocated			Total
Allowance for credit losses:

Beginning balance	$	18,610		$	83,052		$	25,426		$	17,973		$	3,400		$	8,792		$	157,253
Charge-offs		(9,059	)		(46,190	)		(7,232	)		(5,994	)		(676	)					(69,151	)
Recoveries		327			53			60			57			77						574
Provision		4,206			7,144			6,537			5,007			385			(1,965	)		21,314

Ending balance	$	14,084		$	44,059		$	24,791		$	17,043		$	3,186		$	6,827		$	109,990


Ending balance: collectively evaluated for impairment	$	8,064		$	16,385		$	15,459		$	8,519		$	2,782		$	6,827		$	58,036


Ending balance: individually evaluated for impairment	$	5,809		$	24,591		$	8,929		$	8,315		$	399					$	48,043


Ending balance: loans acquired with deteriorated credited quality	$	211		$	3,083		$	403		$	209		$	5					$	3,911

Transactions (in thousands) affecting the allowance for loan losses during the three months ended March 31, 2010 were as follows.


	2010

Balance at beginning of period	$	132,697
Provision for loan losses		45,613
Loans charged off		(28,119	)
Recoveries		1,035

Balance at end of period	$	151,226

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impaired Loans

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms. For collateral dependent impaired loans, impairment is measured based upon the fair value of the underlying collateral. Management considers a loan to be collateral dependent when repayment of the loan is expected solely from the sale or liquidation of the underlying collateral. The Company’s policy is to charge off collateral dependent impaired loans at the time of foreclosure, repossession, or liquidation or at such time any portion of the loan is deemed to be uncollectible and in no case later than 180 days in nonaccrual status. The Company will reduce the carrying value of the loan to the estimated fair value of the collateral less estimated selling costs through a charge off to the allowance for loan losses. For loans that are not collateral dependent, impairment is measured using discounted cash flows. Total impaired loans were $303.2 million and $356.9 million at March 31, 2011 and December 31, 2010, respectively, the majority of which were considered collateral dependent, and therefore, measured at the fair value of the underlying collateral.

Impaired loans for which no allowance is provided totaled $88.6 million and $107.3 million at March 31, 2011 and December 31, 2010, respectively. Loans written down to their estimated fair value of collateral less the costs to sell account for $20.0 million of the impaired loans for which no allowance has been provided as of March 31, 2011 and December 31, 2010. The average age of appraisals for these loans is 0.57 years at March 31, 2011. The remaining impaired loans for which no allowance is provided are fully covered by the value of the collateral, and therefore, no loss is expected on these loans.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following charts show impaired loans (in thousands) by class as of March 31, 2011 and December 31, 2010.


March 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

With no related allowance recorded:
Commercial & Industrial	$	11,799	$	15,103	$	—	$	15,022	$	59
Construction
1-4 family residential construction		2,595		2,633		—		2,637		—
Commercial construction		22,814		51,848		—		61,715		155
Real estate
Commercial Mortgage
Owner occupied		23,521		24,445		—		24,688		352
Non-owner occupied		13,410		28,516		—		28,707		—
Residential Mortgage
Secured by 1-4 family, 1st lien		12,496		13,683		—		13,916		101
Secured by 1-4 family, junior lien		1,979		3,040		—		3,242		6
Installment		38		64		—		66		1

With an allowance recorded:
Commercial & Industrial		16,717		18,656		6,239		27,133		171
Construction
1-4 family residential construction		5,836		8,380		1,068		8,406		10
Commercial construction		105,702		160,929		26,286		186,336		696
Real estate
Commercial Mortgage
Owner occupied		27,568		28,299		6,435		27,856		220
Non-owner occupied		28,329		31,094		3,159		34,557		330
Residential Mortgage
Secured by 1-4 family, 1st lien		23,605		25,075		4,674		25,238		217
Secured by 1-4 family, junior lien		6,229		7,598		3,673		7,668		39
Installment		587		633		420		634		0

Total:
Commercial & Industrial		28,516		33,759		6,239		42,155		230
Construction		136,947		223,790		27,354		259,094		861
Real estate-commercial mortgage		92,828		112,354		9,594		115,808		902
Real estate-residential mortgage		44,309		49,396		8,347		50,064		363
Installment		625		697		420		700		1

Total		303,225		419,996		51,954		467,821		2,357

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

With no related allowance recorded:
Commercial & Industrial	$	12,453	$	16,397	$	—	$	15,086	$	176
Construction
1-4 family residential construction		5,373		6,137		—		6,930		10
Commercial construction		36,792		62,020		—		43,289		329
Real estate
Commercial Mortgage
Owner occupied		10,195		10,752		—		11,574		491
Non-owner occupied		20,866		34,830		—		26,019		126
Residential Mortgage
Secured by 1-4 family, 1st lien		17,266		19,445		—		22,235		211
Secured by 1-4 family, junior lien		4,259		5,044		—		5,338		5
Installment		93		116		—		192		—

With an allowance recorded:
Commercial & Industrial		19,141		21,902		8,852		21,724		171
Construction
1-4 family residential construction		5,693		7,121		1,130		1,998		118
Commercial construction		133,429		152,938		57,392		155,562		1,491
Real estate
Commercial Mortgage
Owner occupied		19,324		20,206		4,411		23,057		559
Non-owner occupied		40,272		56,692		7,248		47,213		1,229
Residential Mortgage
Secured by 1-4 family, 1st lien		25,071		25,596		6,660		29,365		405
Secured by 1-4 family, junior lien		4,463		4,886		3,072		5,143		37
Installment		2,186		3,881		1,073		3,871		—

Total:
Commercial & Industrial		31,594		38,299		8,852		36,810		347
Construction		181,287		228,216		58,522		207,779		1,948
Real estate-commercial mortgage		90,657		122,480		11,659		107,863		2,405
Real estate-residential mortgage		51,059		54,971		9,732		62,081		658
Installment		2,279		3,997		1,073		4,063		—

Total		356,876		447,963		89,838		418,596		5,358

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Non-performing Assets

Non-performing assets consist of loans 90 days past due and still accruing interest, nonaccrual loans, and foreclosed real estate and repossessed assets. Total non-performing assets were $269.3 million or 10% of total assets at March 31, 2011 compared with $315.4 million or 11% of total assets at December 31, 2010. Non-performing assets (in thousands) were as follows.


	March 31, 2011		December 31, 2010

Loans 90 days past due and still accruing interest	$	770	$	—
Nonaccrual loans, including nonaccrual impaired loans		197,708		255,992
Foreclosed real estate and repossessed assets		70,790		59,423


Non-performing assets	$	269,268	$	315,415

Nonaccrual and Past Due Loans

A reconciliation of non-performing loans to impaired loans (in thousands) for the quarter ended March 31, 2011 and December 31, 2010 is as follows.


	March 31, 2011		December 31, 2010

Loans 90 days past due and still accruing interest	$	770	$	—
Nonaccrual loans, including nonaccrual impaired loans		197,708		255,992

Total non-performing loans		198,478		255,992
TDRs on accrual		34,457		63,932
Impaired loans on accrual		70,290		36,952


Total impaired loans	$	303,225	$	356,876

Nonaccrual loans were $197.7 million at March 31, 2011 compared to $256.0 million at December 31, 2010. As a general rule, loans are placed in nonaccrual status when principal or interest is 90 days or more past due. If income on nonaccrual loans had been recorded under original terms, $7.7 million of additional interest income would have been recorded for the three months ended March 31, 2011.

An age analysis of past due loans as of March 31, 2011 and December 31, 2010 is as follows.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current			Total Loans			Recorded Investment >90 Days and Accruing

Commercial & Industrial	$	1,890	$	34	$	15,348	$	17,272	$	253,410		$	270,682		$	—
Construction
1-4 family residential construction		698		1,527		8,150		10,375		30,710			41,085			—
Commercial construction		10,738		642		101,788		113,168		240,975			354,143			—
Real estate
Commercial Mortgage
Owner occupied		1,537		1,284		18,967		21,788		314,130			335,918			—
Non-owner occupied		1,111		5,556		19,556		26,223		268,262			294,485			—
Residential Mortgage
Secured by 1-4 family, 1st lien		6,132		959		26,577		33,668		232,991			266,659			770
Secured by 1-4 family, junior lien		623		400		7,516		8,539		196,844			205,383			—
Installment		84		10		576		670		37,569			38,239			—
Deferred loan fees and related costs		—		—		—		—		(147	)		(147	)		—


Total	$	22,813	$	10,412	$	198,478	$	231,703	$	1,574,744		$	1,806,447		$	770


December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current			Total Loans			Recorded Investment >90 Days and Accruing

Commercial & Industrial	$	2,061	$	683	$	25,346	$	28,090	$	276,460		$	304,550		$	—
Construction
1-4 family residential construction		—		—		7,273		7,273		27,477			34,750			—
Commercial construction		6,615		321		132,395		139,331		301,203			440,534			—
Real estate
Commercial Mortgage
Owner occupied		—		—		8,275		8,275		338,439			346,714			—
Non-owner occupied		8,938		1,024		44,260		54,222		258,033			312,255			—
Residential Mortgage
Secured by 1-4 family, 1st lien		2,238		919		29,313		32,470		276,469			308,939			—
Secured by 1-4 family, junior lien		1,033		881		7,838		9,752		168,868			178,620			—
Installment		43		7		1,292		1,342		31,366			32,708			—
Deferred loan fees and related costs		—		—		—		—		(303	)		(303	)		—


Total	$	20,928	$	3,835	$	255,992	$	280,755	$	1,678,012		$	1,958,767		$	—

Credit Quality

The Company experienced a significant deterioration in credit quality in 2009 and 2010. Problem loans and non-performing assets rose and led to significant increases to the allowance for loan losses. Due to a reduction in newly identified problem loans and continuing declines in loans outstanding, we decreased the provision for loan losses to $21.3 million in the first three months of 2011 compared to $45.6 million for the first three months of 2010.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management regularly reviews the loan portfolio to determine whether adjustments to the allowance are necessary. The review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay. In addition to the review of credit quality through ongoing credit review processes, management performs a comprehensive allowance analysis at least quarterly. This allowance includes specific allowances for individual loans; general allowance for loan pools, which factor in our historical loan loss experience, loan portfolio growth and trends, and economic conditions; and unallocated allowances predicated upon both internal and external factors.

The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is attached to loans where the borrower exhibits material negative financial trends due to company specific or systematic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “nonaccrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment. The following tables provide information (in thousands) on March 31, 2011 and December 31, 2010 about the credit quality of the loan portfolio using the Company’s internal rating system as an indicator.


March 31, 2011	Pass		Special Mention		Substandard			Non-Performing Loans		Total

Commercial & Industrial	$	195,583	$	35,251	$	24,500		$	15,348	$	270,682
Construction
1-4 family residential construction		15,991		1,813		6,661			8,150		32,615
Commercial construction		120,245		65,032		75,548			101,788		362,613
Real estate
Commercial Mortgage
Owner occupied		234,002		45,124		42,619			18,967		340,712
Non-owner occupied		193,301		45,254		31,580			19,556		289,691
Residential Mortgage
Secured by 1-4 family, 1st lien		214,782		30,738		21,558			26,577		293,655
Secured by 1-4 family, junior lien		152,829		5,135		12,907			7,516		178,387
Installment		19,604		12,195		5,864			576		38,239
Deferred loan fees and related costs		—		—		(147	)		—		(147	)


Total	$	1,146,337	$	240,542	$	221,090		$	198,478	$	1,806,447

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2010	Pass			Special Mention		Substandard		Non-Performing Loans		Total

Commercial & Industrial	$	225,389		$	44,131	$	9,684	$	25,346	$	304,550
Construction
1-4 family residential construction		19,080			2,207		6,190		7,273		34,750
Commercial construction		145,158			74,512		88,469		132,395		440,534
Real estate
Commercial Mortgage
Owner occupied		250,330			48,583		39,526		8,275		346,714
Non-owner occupied		191,080			43,226		33,689		44,260		312,255
Residential Mortgage
Secured by 1-4 family, 1st lien		226,389			32,632		20,605		29,313		308,939
Secured by 1-4 family, junior lien		151,221			9,916		9,645		7,838		178,620
Installment		17,531			10,691		3,194		1,292		32,708
Deferred loan fees and related costs		(303	)		—		—		—		(303	)


Total	$	1,225,875		$	265,898	$	211,002	$	255,992	$	1,958,767

Modifications

A restructured loan results in a Troubled Debt Restructuring (“TDR”) when two conditions are present: 1) a borrower is experiencing financial difficulty and 2) a creditor grants a concession, such as an interest rate reduction, maturity extension and rate below market, reduction of face amount of debt, or reduction of accrued interest. As of March 31, 2011 and December 31, 2010, loans classified as TDRs were $80.3 million and $85.8 million, respectively. All of these were included in the impaired loan disclosure. Of this amount, $40.5 million was accruing and $39.8 million was non-accruing at March 31, 2011 and $63.9 million was accruing and $21.9 million was non-accruing at December 31, 2010. TDRs in nonaccrual status are returned to accrual status after a period of performance under which the borrower demonstrates the ability and willingness to repay the loan. None of the nonaccrual TDRs were returned to accrual status during the quarter ended March 31, 2011 and year ended December 31, 2010.

NOTE H – PREMISES AND EQUIPMENT

Premises and equipment (in thousands) at March 31, 2011 and December 31, 2010 are summarized as follows.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	March 31, 2011			December 31, 2010

Land	$	31,238		$	31,238
Buildings and improvements		58,807			58,177
Leasehold improvements		3,337			3,418
Equipment, furniture, and fixtures		15,887			14,563
Construction in process		—			7


		109,269			107,403
Less accumulated depreciation and amortization		(16,736	)		(13,989	)


Premises and equipment, net	$	92,533		$	93,414

NOTE I – SUPPLEMENTAL RETIREMENT AGREEMENTS

The Company has entered into supplemental retirement agreements with several key officers and recognizes expense each year related to these agreements based on the present value of the benefits expected to be provided to the employees and any beneficiaries. The expense recognized during the first three months of 2011 and 2010 was $100 thousand and $148 thousand, respectively.

NOTE J – INTANGIBLE ASSETS

Intangible assets with an indefinite life are subject to impairment testing at least annually or more often if events or circumstances suggest potential impairment. Other acquired intangible assets determined to have a finite life are amortized over their estimated useful life in a manner that best reflects the economic benefits of the intangible asset. Intangible assets with a finite life are reviewed for impairment if conditions suggest the carrying amount is not recoverable. The gross carrying amount and accumulated amortization (in thousands) for the Company’s intangible assets is as follows.


	March 31, 2011				December 31, 2010
	Carrying Amount		Accumulated Amortization		Carrying Amount		Accumulated Amortization
Intangible assets:

Core deposit intangible	$	8,105	$	3,389	$	8,105	$	3,058
Employment contract intangibles		1,130		957		1,130		909
Insurance book of business intangible		6,450		968		6,450		860


Total intangible assets	$	15,685	$	5,314	$	15,685	$	4,827

The weighted-average amortization period for core deposit intangibles is 79 months, employment contract intangibles is 36 months, and insurance book of business intangible is 180 months.

NOTE K – FORECLOSED REAL ESTATE AND REPOSSESSED ASSETS

Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for losses (in thousands) on foreclosed assets is as follows.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	March 31, 2011			March 31, 2010

Balance at beginning of year	$	9,533		$	356
Provision for losses		2,547			724
Charge-offs		(1,632	)		(449	)

Balance at end of quarter	$	10,448		$	631

Expenses (in thousands) applicable to foreclosed and repossessed assets for the three months ended March 31, 2011 and 2010 include the following.


	March 31, 2011		March 31, 2010

Losses on sale of foreclosed real estate	$	1,135	$	14
Provision for losses		2,547		724
Operating expenses		992		—

Total	$	4,674	$	738

NOTE L – BUSINESS SEGMENT REPORTING

The Company defines it operating segments by product and consumer. The Company has two community banks, BOHR and Shore, which provide loan and deposit services throughout 56 locations in Virginia, North Carolina, and Maryland. In addition to its banking operations, the Company has three other reportable segments: Mortgage, Investment, and Insurance. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”). Segment profit and loss is measured by net income prior to corporate overhead allocation. Intersegment transactions are recorded at cost and eliminated as part of the consolidation process. Because of the interrelationships between the segments, the information is not indicative of how the segments would perform if they operated as independent entities. The following tables show certain financial information (in thousands) at March 31, 2011, December 31, 2010, and March 31, 2010 for each segment and in total.


	Total		Elimination			Banking		Mortgage		Investment		Insurance

*Total Assets at March 31, 2011*	$	2,717,383	$	(243,325	)	$	2,934,329	$	16,134	$	1,119	$	9,126


*Total Assets at December 31, 2010*	$	2,900,156	$	(281,626	)	$	3,146,314	$	25,393	$	1,111	$	8,964

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Three Months Ended March 31, 2011	Total			Elimination		Banking			Mortgage			Investment			Insurance

Net interest income	$	18,224		$	—	$	18,172		$	51		$	—		$	1
Provision for loan losses		21,314			—		21,314			—			—			—

Net interest income (loss) after provision for loan losses		(3,090	)		—		(3,142	)		51			—			1
Noninterest income		2,125			—		(308	)		1,250			30			1,153
Noninterest expense		30,642			—		27,337			2,345			23			937

Net income (loss) before income taxes (benefit)		(31,607	)		—		(30,787	)		(1,044	)		7			217
Income tax expense (benefit)		44			—		331			(365	)		2			76

Net income (loss)		(31,651	)		—		(31,118	)		(679	)		5			141
Net income attributable to non-controlling interest		17			—		—			17			—			—

Net income (loss) attributable to Hampton Roads Bankshares, Inc.	$	(31,668	)	$	—	$	(31,118	)	$	(696	)	$	5		$	141


Three Months Ended March 31, 2010 as restated	Total			Elimination		Banking			Mortgage			Investment			Insurance

Net interest income	$	21,933		$	—	$	21,845		$	85		$	—		$	3
Provision for loan losses		45,613			—		45,613			—			—			—

Net interest income (loss) after provision for loan losses		(23,680	)		—		(23,768	)		85			—			3
Noninterest income		5,601			—		2,487			1,755			39			1,320
Noninterest expense		20,980			—		18,466			1,336			52			1,126

Net income (loss)		(39,059	)		—		(39,747	)		504			(13	)		197
Income tax expense (benefit)		62			—		(178	)		176			(5	)		69

Net income (loss)	$	(39,121	)	$	—	$	(39,569	)	$	328		$	(8	)	$	128

NOTE M – FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company groups financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The majority of instruments fall into the Level 1 or 2 fair value hierarchy. Valuation methodologies for the fair value hierarchy are as follows:

Level 1

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain United States Department of the Treasury (the “Treasury”) securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The aggregate fair value amounts presented below do not represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair value for its financial instruments.

(a)

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, overnight funds sold and due from FRB, and interest-bearing deposits in other banks. The carrying amount approximates fair value.

(b)

Investment Securities Available for Sale

Fair values are based on published market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Investment securities available for sale are carried at their aggregate fair value.

(c)

Loans Held for Sale

The carrying value of loans held for sale is a reasonable estimate of fair value since loans are expected to be sold within a short period.

(d)

Loans

To determine the fair values of loans other than those listed as nonaccrual, we use discounted cash flow analyses. In these analyses, we use discount rates that are similar to the interest rates and terms currently being offered to borrowers of similar terms and credit quality. We believe our disclosures provide fair values that are more indicative of an entry price. This technique does not contemplate an exit price. We do not record loans at fair value on a recurring basis. We record fair value adjustments to loans on a nonrecurring basis to reflect full and partial charge-offs due to impairment. For nonaccrual loans, we use a variety of techniques to measure fair value, such as using the current appraised value of the collateral, discounting the contractual cash flows, and analyzing market data that we may adjust due to the specific characteristics of the loan or collateral.

(e)

Interest Receivable and Interest Payable

The carrying amount approximates fair value.

(f)

Bank-Owned Life Insurance

The carrying amount approximates fair value.

(g)

Deposits

The fair values disclosed for demand deposits (for example, interest and noninterest demand and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (this is, their carrying values). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(h)

Borrowings

The fair value of borrowings is estimated using discounted cash flow analysis based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements. These include other borrowings, overnight funds purchased, and FHLB borrowings.

(i)

Commitments to Extend Credit and Standby Letters of Credit

The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed significant at March 31, 2011 and December 31, 2010, and as such, the related fair values have not been estimated.

The estimated fair value (in thousands) of the Company’s financial instruments at March 31, 2011 and December 31, 2010 were as follows.


	March 31, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and due from banks	$	18,921	$	18,921	$	17,726	$	17,726
Overnight funds sold and due from FRB		352,070		352,070		440,844		440,844
Interest-bearing deposits in other banks		1,786		1,786		2,342		2,342
Investment securities available for sale		349,258		349,258		334,237		334,237
Loans held for sale		12,161		12,161		22,499		22,499
Loans, net		1,696,457		1,736,407		1,801,514		1,849,773
Interest receivable		7,540		7,540		7,278		7,278
Bank-owned life insurance		50,693		50,693		50,213		50,213

Liabilities:
Deposits		2,271,002		2,230,418		2,420,161		2,408,466
FHLB borrowings		212,559		221,924		213,353		224,262
Other borrowings		50,003		51,250		49,853		51,762
Interest payable		3,729		3,729		3,644		3,644

Recurring Basis

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities that were elected as well as for certain assets and liabilities in which fair value is the primary basis of accounting. The following tables reflect the fair value (in thousands) of assets and liabilities measured and recognized at fair value on a recurring basis in the consolidated balance sheets at March 31, 2011 and December 31, 2010.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


			Fair Value Measurements at March 31, 2011 Using
Description	Assets / Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Investment securities available for sale:
Agency securities	$	94,492	$	—	$	94,492	$	—
Mortgage-backed securities		252,610		—		252,610		—
Equity securities		2,156		738		—		1,418

Total investment securities available for sale		349,258		738		347,102		1,418

Derivative loan commitments		256		—		—		256
Loans held for sale		12,161		—		12,161		—

			Fair Value Measurements at December 31, 2010 Using
Description	Assets / Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Investment securities available for sale:
Agency securities	$	88,702	$	—	$	88,702	$	—
Mortgage-backed securities		243,348		—		243,348		—
Equity securities		2,187		769		—		1,418

Total investment securities available for sale		334,237		769		332,050		1,418

Derivative loan commitments		952		—		—		952
Loans held for sale		22,499		—		22,499		—

The following table shows a reconciliation of fair value (in thousands) using significant unobservable inputs for the three months ended March 31, 2011.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	Activity in Fair Value Measurements Three Months Ended March 31, 2011
	Investment Securities Available for Sale								Derivative Loan Commitments			Loans Held for Sale
Description	Level 1			Level 2			Level 3		Level 3			Level 2

Balance, December 31, 2010	$	769		$	332,050		$	1,418	$	952		$	22,499
Unrealized losses included in:
Earnings		—			—			—		—			—
Other comprehensive (loss) gain		(31	)		1,120			—		—			—
Purchases		—			28,887			—		—			91,562
Sales		—			—			—		—			(101,900	)
Issuances		—			—			—		—			—
Settlements		—			(14,955	)		—		(696	)		—
Transfers in		—			—			—		—			—
Transfers out		—			—			—		—			—

Balance, March 31, 2011	$	738		$	347,102		$	1,418	$	256		$	12,161

The following describes the valuation techniques used to measure fair value for our assets and liabilities classified as recurring.

Investment Securities Available for Sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products, and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions, and certain corporate, asset backed, and other securities valued using third party quoted prices in markets that are not active. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Derivative Loan Commitments. The Company enters into commitments to originate mortgage loans whereby the interest rate is fixed prior to funding. These commitments, in which the Company intends to sell in the secondary market, are considered freestanding derivatives. These are carried at fair value and are included in other assets at March 31, 2011 and December 31, 2010.

Loans Held For Sale. The Company sells loans to outside investors. Fair value of mortgage loans held for sale is estimated based on the commitments into which individual loans will be delivered. Carrying value of loans held for sale approximates fair value.

Non-recurring Basis

Certain assets, primarily impaired loans, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The adjustments are based on appraisals of underlying collateral or other observable market prices when current appraisals or observable market prices are available. Where we do not have a current appraisal, an existing appraisal or other valuation would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with respect to the determination of fair value.

To assist in the discounting process, a valuation matrix was developed to provide valuation guidance for collateral dependent loans and foreclosed real estate where it was deemed that an existing appraisal was outdated as to current market conditions. The matrix applies discounts to external appraisals depending on the type of real estate and age

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of the appraisal. The discounts are generally specific point estimates; however in some cases, the matrix allows for a small range of values. The discounts were based in part upon externally derived statistical data. The discounts were also based upon management’s knowledge of market conditions and prices of sales of foreclosed real estate. In addition, matrix value adjustments may be made by our independent appraisal group to reflect property value trends within specific markets as well as actual sales data from market transactions and/or foreclosed real estate sales. In the case where an appraisal is greater than two years old for collateral dependent impaired loans and foreclosed real estate, it is the Company’s policy to classify these as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2. The average age of appraisals for Level 3 valuations of collateral dependent loans was 3.91 years as of March 31, 2011. Management periodically reviews the discounts in the matrix as compared to valuations from updated appraisals and modifies the discounts accordingly should updated appraisals reflect valuations significantly different than those derived utilizing the matrix. To date, management believes the appraisal discount matrix has resulted in appropriate adjustments to existing appraisals thereby providing management with reasonable valuations for the collateral underlying the loan portfolio. The following tables represent the carrying amount (in thousands) for impaired loans and adjustments made to fair value during the respective reporting periods.



	Assets / Liabilities Measured at		Fair Value Measurements at March 31, 2011 Using
Description	Fair Value		Level 1		Level 2		Level 3		Total Losses

Impaired loans	$	162,621	$	—	$	125,920	$	36,701	$	—

	Assets / Liabilities Measured at		Fair Value Measurements at December 31, 2010 Using
Description	Fair Value		Level 1		Level 2		Level 3		Total Losses

Impaired loans	$	159,741	$	—	$	133,861	$	25,880	$	—

Our nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis relate to foreclosed real estate and repossessed assets. The amounts below represent the carrying values (in thousands) for our foreclosed real estate and repossessed assets and impairment adjustments made to fair value during the respective reporting periods.



	Assets / Liabilities Measured at		Fair Value Measurements at March 31, 2011 Using
Description	Fair Value		Level 1		Level 2		Level 3		Total Losses

Foreclosed real estate and repossessed assets	$	70,790	$	—	$	70,790	$	—	$	3,682

	Assets / Liabilities Measured at		Fair Value Measurements at December 31, 2010 Using
Description	Fair Value		Level 1		Level 2		Level 3		Total Losses

Foreclosed real estate and repossessed assets	$	59,423	$	—	$	59,423	$	—	$	11,228

The following describes the valuation techniques used to measure fair value for our nonfinancial assets and liabilities classified as nonrecurring.

Foreclosed Real Estate and Repossessed Assets. The adjustments to foreclosed real estate and repossessed assets are based primarily on appraisals of the real estate or other observable market prices. Our policy is that fair values for these assets are based on current appraisals. In most cases, we maintain current appraisals for these items. Where we do not have a current appraisal, an existing appraisal would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with the respect of the determination of fair value. As described above, we utilize a valuation matrix to assist in this process.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N – THE TARP CAPITAL PURCHASE PROGRAM

On December 31, 2008, and subsequent to the Company’s acquisition of Gateway Financial Holdings, Inc. (“GFH”), as part of the Treasury’s Capital Purchase Program (“TARP”), the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the Treasury, pursuant to which the Company sold 80,347 shares of Series C preferred stock, having a liquidation preference of $1,000 per share and a Warrant to purchase 53,035 shares of Common Stock at an initial exercise price of $227.25 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $80.3 million in cash.

On August 12, 2010, the Company and Treasury executed the Exchange Agreement (the “Exchange Agreement”), which provided for (i) the exchange of the 80,347 shares of Series C preferred stock for 80,347 shares of a newly-created Series C-1 preferred stock with a liquidation preference of $1,000, (ii) the conversion of the Series C-1 Preferred at a discounted conversion value of $6,500 per share into 2,089,022 shares of Common Stock at a conversion price of $10.00 per share; and (iii) the amendment of the terms of the Warrant to provide for the purchase of up to 53,035 shares of Common Stock at an exercise price of $10.00 per share for a ten-year term following the issuance of the amended warrant. These transactions took place in the third quarter of 2010.

NOTE O – NONINTEREST EXPENSE

A summary of noninterest expense (in thousands) for the three months ended March 31, 2011 and 2010 is as follows.


	Three Months Ended March 31,
	2011		2010
Salaries and employee benefits	$	12,355	$	9,750
FDIC insurance		6,709		1,056
Occupancy		2,326		2,298
Professional fees and consultants		2,185		1,316
Problem loan and repossessed assets		1,416		613
Data processing		1,007		1,480
Equipment		806		1,091
Amortization of intangible assets		487		495
Bank franchise tax		484		510
Telephone and postage		419		391
Other		2,448		1,980

Total noninterest expense	$	30,642	$	20,980

NOTE P – CONTINGENCIES

In the ordinary course of operations, the Company may become a party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on our business, financial condition, or results of operations.

On November 2, 2010, the Company received from the United States Department of Justice, Criminal Division a grand jury subpoena. For a discussion of this matter, see “Risk Factors – Risks Relating to our Business – The Company has received a grand jury subpoena from the United States Department of Justice, Criminal Division, and although the Company is not a target at this time and we do not believe the Company will become a target, there can be no assurances as to the timing or the eventual outcome of the related investigation” in the 2010 Form 10-K.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In April 2011, the Securities and Exchange Commission informed the Company that it is conducting a formal investigation related to certain accounting matters. For a further discussion of this matter, see “Risk Factors – The formal investigation by the Securities and Exchange Commission may harm our business.”

NOTE Q – SUBSEQUENT EVENTS

We evaluate subsequent events through the date the financial statements are issued.

On March 18, 2011, the Board of Directors of the Company unanimously adopted resolutions approving an amendment to the Articles to effect a 1-for-25 reverse stock split of all outstanding shares of the Common Stock effective April 27, 2011. Refer to Note A, Basis of Presentation, in this Form 10-Q for more information.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Where appropriate, statements in this report may contain the insights of management into known events and trends that have or may be expected to have a material effect on our operations and financial condition. The information presented may also contain certain forward-looking statements regarding future financial performance, which are not historical facts and involve various risks and uncertainties.

When or if used in this quarterly report or any Securities and Exchange Commission filings, other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “is estimated,” “is projected,” or similar expressions are intended to identify “forward-looking statements.”

For a discussion of the risks, uncertainties, and assumptions that could affect these statements and our future events, developments, or results, you should carefully review the risk factors contained in this Form 10-Q and in our 2010 Form 10-K, which are summarized below. Our risks include, without limitation, the following:

•

We incurred significant losses in 2009 and 2010 and through the first quarter of 2011 and may continue to do so in the future, and we can make no assurances as to when we will be profitable;

•

The determination of the appropriate balance of our allowance for loan losses is merely an estimate of the inherent risk of loss in our existing loan portfolio and, like all estimates, may prove to be incorrect. If such estimate is proven to be incorrect, and we are required to increase our allowance for loan losses, our results of operations, financial condition and the value of our Common Stock could be adversely affected;

•

BOHR is restricted from accepting new brokered deposits, and an inability to maintain our regulatory capital position could adversely affect our operations;

•

We may need to raise additional capital that may not be available to us;

•

The Company has restated its financial statements, which may have a future adverse effect;

•

The formal investigation by the Securities and Exchange Commission may harm our business;

•

The Company has received a grand jury subpoena from the United States Department of Justice, Criminal Division (“DOJ”) and, although the Company is not a target, there can be no assurances as to the timing or eventual outcome of the related investigation;

•

Current and future increases in Federal Deposit Insurance Corporation (“FDIC”) insurance premiums, including the FDIC special assessment imposed on all FDIC-insured institutions, will decrease our earnings. In addition, FDIC insurance assessments will likely increase from the prior inability to maintain a well- capitalized status, which would further decrease earnings;

•

We have entered into a written agreement with the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions, which requires us to designate a significant amount of resources to complying with the agreement and may have a material adverse effect on our operations and the value of our securities;

•

We have had and may continue to have large numbers of problem loans and difficulties with our loan administration, which could increase our losses related to loans;

•

Governmental regulation and regulatory actions against us may impair our operations or restrict our growth;

•

If the value of real estate in the markets we serve were to further decline materially, a significant portion of our loan portfolio could become further under-collateralized, which could have a material adverse effect on us;

•

Our commercial real estate and equity line lending may expose us to a greater risk of loss and hurt our earnings and profitability;

•

A significant amount of our loan portfolio contains loans used to finance construction and land development and these types of loans subject our loan portfolio to a higher degree of credit risk;

•

Our lending on vacant land may expose us to a greater risk of loss and may have an adverse effect on results of operations;

•

Difficult market conditions have adversely affected our industry;

•

We are not paying dividends on our Common Stock and currently are prevented from doing so. The failure to resume paying dividends on our Common Stock may adversely affect us;

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

•

Our ability to maintain adequate sources of funding may be negatively impacted by the current economic environment which may, among other things, impact our future ability to pay dividends or satisfy our obligations;

•

Our ability to maintain adequate sources of liquidity may be negatively impacted by the current economic environment which may, amount other things, impact our ability to pay dividends or satisfy our obligations;

•

The current economic environment may negatively impact our ability to maintain required capital levels or otherwise negatively impact our financial condition, which may, among other things, limit access to certain sources of funding and liquidity;

•

We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability;

•

We may continue to incur losses if we are unable to successfully manage interest rate risk;

•

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry;

•

Our operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in our market area;

•

We face a variety of threats from technology based frauds and scams;

•

Virginia law and the provisions of our Articles of Incorporation and Bylaws could deter or prevent takeover attempts by a potential purchaser of our Common Stock that would be willing to pay you a premium for your shares of our Common Stock;

•

Our business, financial condition, and results of operations are highly regulated and could be adversely affected by new or changed regulations and by the manner in which such regulations are applied by regulatory authorities;

•

Banking regulators have broad enforcement power, but regulations are meant to protect depositors and not investors;

•

The fiscal, monetary, and regulatory policies of the Federal Government and its agencies could have a material adverse effect on our results of operations;

•

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) may adversely affect our business, financial condition, and results of operations; and

•

The soundness of other financial institutions could adversely affect us.

Our forward-looking statements could be incorrect in light of these risks, uncertainties, and assumptions. The future events, developments, or results described in this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this quarterly report and you should not expect us to do so.

Overview

Throughout the first three months of 2011, economic conditions in the markets in which our borrowers operate remained depressed; however, the levels of loan delinquencies and defaults that we experienced began to stabilize. The Company reported a net loss for the three-month period ended March 31, 2011, primarily as a result of a significant provision for loan losses, losses on foreclosed real estate and repossessed assets, other expenses related to the resolution of problem loans, and a one-time adjustment to our FDIC insurance expense. Additionally, the Company continues to record a valuation allowance on its deferred tax assets. The Company, BOHR, and Shore are “well-capitalized” under applicable banking regulations as of March 31, 2011.

Our primary source of revenue is net interest income earned by our bank subsidiaries. Net interest income represents interest and fees earned from lending and investment activities, less the interest paid on deposits and borrowings. Net interest income may be impacted by variations in the volume and mix of interest-earning assets and interest-bearing liabilities, changes in the yields earned and the rates paid, level of non-performing interest-earning assets, and the levels of noninterest-bearing liabilities available to support earning assets. Our net interest income was negatively impacted by high levels of non-performing loans. In addition to net interest income, noninterest income is another important source of revenue. Noninterest income is derived primarily from service charges on deposits and fees earned from bank services. Fees earned from investment, mortgage, and insurance activities also represent a significant component of noninterest income. Other factors that impact net income are the provision for loan losses, and noninterest expense.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a summary of our financial condition as of March 31, 2011 and our financial performance for the three month period then ended.

•

Assets were $2.7 billion. They decreased by $182.8 million or 6% during the first three months of 2011. This was primarily the result of a decrease in net loans of $105.1 million or 6% and overnight funds sold and due from the FRB of $88.8 million or 20%.

•

Investment securities available for sale increased $15.1 million to $349.3 million during the first three months of 2011. The increase was the result of our investing some of the funds obtained from the capital raise into pledgable interest-earning securities.

•

Loans decreased by $152.3 million or 8% during the three months ended March 31, 2011 as loan paydowns and charge-offs exceeded the volume of new originations. New loan activity continues to be low as a result of our tighter underwriting criteria and economic conditions in our markets.

•

Allowance for loan losses at March 31, 2011 decreased $47.3 million to $110.0 million from $157.3 million at December 31, 2010 as net charge-offs during the quarter exceeded the provision.

•

Deposits decreased $149.2 million or 6% as a result of decreases in interest-bearing demand accounts of $78.9 million, time deposits under $100 thousand of $23.0 million, and time deposits over $100 thousand of $48.8 million. Declines in deposits resulted from the Company’s strategy of reducing interest rates in an effort to improve earnings and reduce excess liquidity.

•

Net loss available to common shareholders for the three months ended March 31, 2011 was $31.7 million or $0.95 per common diluted share and $40.5 million or $45.74 per common diluted share for the three months ended March 31, 2010. This net loss was primarily attributable to provisions for loan losses, impairments and losses on OREO, and other expenses necessary for resolving problem loans.

•

Net interest income decreased $3.7 million to $18.2 million for the three months ended March 31, 2011 as compared to the same period in 2010. This was primarily the result of the $7.7 million decrease in interest income from loans due to the decline in loans outstanding, partially offset by the $3.2 million decrease in interest expense on deposits resulting from lower deposit volumes and rates.

•

Noninterest income for the three months ended March 31, 2011 was $2.1 million, a 62% decrease over the comparable period in 2010. This was primarily the result of increased losses on foreclosed assets and a decrease in mortgage banking revenue.

•

Noninterest expense was $30.6 million for the three months ended March 31, 2011, which was an increase of $9.7 million or 46% over the comparable period for 2010, primarily due to a true-up of our FDIC insurance expense and increases in salary and benefits costs related to the growth in mortgage operations.

•

Our effective tax rate decreased to 0.14% at March 31, 2011 compared to 0.16% at March 31, 2010. These rates are lower than the statutory rate due to the valuation allowance against the Company’s deferred tax assets.

Critical Accounting Policies

GAAP requires management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments, and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions, and estimates. Changes in such judgments, assumptions, and estimates may have a significant impact on the consolidated financial statements and the accompanying footnotes. Actual results, in fact, could differ from those estimates. We consider our policies on allowance for loan losses, intangible assets, deferred income taxes, and estimates of fair value on financial instruments to be critical accounting policies. Refer to our 2010 Form 10-K for further discussion of these policies.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Material Trends and Uncertainties

Currently, the U.S. economy has emerged and appears to be slowly recovering from one of its longest economic recessions in recent history. It is not clear at this time how quickly the economy will recover and whether regulatory and legislative efforts to stimulate job growth and spending will be successful. In addition, the U.S. housing market continues to struggle with excess inventory and the effects of home price depreciation.

We experienced a significant deterioration in credit quality throughout 2009 and 2010. Problem loans and non-performing assets rose and led us to significantly increase the allowance for loan losses in those years. Due to a reduction in newly identified problem loans and continuing declines in loans outstanding, we decreased the provision for loan losses to $21.3 million in the first three months of 2011 compared to $45.6 million for the first three months of 2010. In light of continued economic weakness, problem credits may continue to rise and significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may incur significant credit costs throughout 2011, which would continue to adversely impact our financial condition, our results of operations, and the value of our common stock.

Moreover, our net interest margin and net interest income declined during 2011 as a result of our reduced levels of performing assets and the related reduction of interest income. Our net interest margin decreased to 2.98% for the three months ended March 31, 2011 compared to 3.39% for the three months ended March 31, 2011, and our net interest income decreased $3.7 million for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.

The Company determined that a valuation allowance on its deferred tax asset should be recognized beginning December 31, 2009 because it is uncertain whether it will realize this asset. Internal Revenue Code Section 382 (“Section 382”) limitations related to the capital raised and resulting change in control for tax purposes during the third and fourth quarter of 2010 add further uncertainty to the realizability of the deferred tax assets in future periods.

On November 2, 2010, the Company received from the DOJ a grand jury subpoena to produce information principally relating to the merger of GFH into the Company on December 31, 2008 and to loans made by GFH and its wholly-owned subsidiary, Gateway Bank & Trust Co. before GFH’s merger with the Company. The DOJ has informed the Company that it is not a target of the investigation at this time, and we are fully cooperating. Although we do not believe this matter will have a material adverse affect on the Company, we can give you no assurances as to the timing or eventual outcome of this investigation.

ANALYSIS OF FINANCIAL CONDITION

Cash and Cash Equivalents. Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from FRB. Cash and cash equivalents are used for daily cash management purposes, management of short-term interest rate opportunities, and liquidity. Cash and cash equivalents as of March 31, 2011 were $372.8 million compared to $460.9 million at December 31, 2010 and consisted mainly of deposits with the FRB.

Securities. Our investment portfolio consists primarily of available-for-sale U.S. Agency and mortgage-backed securities. Our available-for-sale securities are reported at estimated fair value. They are used primarily for liquidity, earnings, and asset/liability management purposes and are reviewed quarterly for possible impairment. At March 31, 2011, the estimated fair value of our available-for-sale investment securities was $349.3 million, an increase of $15.1 million or 4% from $334.2 million at December 31, 2010.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Loan Portfolio. Our loan portfolio is comprised of commercial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment loans to individuals. Lending decisions are based upon an evaluation of the capacity to repay, financial strength, and credit history of the borrower, the quality and value of the collateral securing each loan, and the financial strength of guarantors. With few exceptions, personal guarantees are required on loans. Our loan portfolio decreased $152.3 million or 8% to $1.8 billion as of March 31, 2011 compared to December 31, 2010. Commercial loans decreased 11% to $270.7 million at March 31, 2011 compared with $304.6 million at December 31, 2010. Construction loans decreased 17% to $395.2 million at March 31, 2011 as compared to $475.3 million at December 31, 2010, thus lowering the concentration of construction loans to 22% of the total loan portfolio at March 31, 2011 compared with 24% at December 31, 2010. Real estate commercial mortgages decreased 4% to $630.4 million at March 31, 2011 compared to $659.0 million at December 31, 2010. Real estate residential mortgages decreased 3% to $472.0 million at March 31, 2011 as compared with $487.6 million at December 31, 2010. Installment loans to individuals increased 17% to $38.2 million at March 31, 2011 compared with $32.7 million at December 31, 2010.

Within the construction segment of the loan portfolio as of March 31, 2011, the Company has exposure on $52.2 million of loans in which interest payments are satisfied through the use of a reserve that was funded by the banks upon origination and represents a portion of the borrower’s total obligation to the banks. In the instance of commercial construction, ultimate repayment is dependent upon stabilization of the funded project; whereas, in residential development, the Company is assigned a certain percentage of each sale to retire a commensurate portion of the outstanding debt. Each interest reserve transaction is monitored by the account officer, a senior credit officer, and credit administration to verify the continuation of project viability as it relates to the remaining interest reserve and additional financial capacity of the project sponsor. In certain instances, where either or both criteria have been deemed unsatisfactory, the borrower’s access to any remaining interest reserve has been curtailed on at least a temporary basis until the Company’s special assets department has been engaged to further evaluate possible resolutions.

Although we are no longer making new loans to finance construction and land development, we have a high concentration of construction and commercial real estate loans. Construction loans have been made to individuals and businesses for the purpose of construction of single family residential properties, multi-family properties, and commercial projects such as the development of residential neighborhoods and commercial office parks. Risk is reduced on these loans by limiting lending for speculative building of both residential and commercial properties based upon the borrower’s history with us, financial strength, and the loan-to-value ratio of such speculative property. We generally require new and renewed variable-rate commercial loans to have interest rate floors.

Allowance for Loan Losses. The purpose of the allowance for loan losses is to provide for probable losses inherent in our loan portfolio. Management regularly reviews the loan portfolio to determine whether adjustments are necessary to maintain an allowance for loan losses sufficient to absorb losses. Our review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay. Some of the tools used in the credit review process to identify potential problem loans include past due reports, collateral valuations, cash flow analyses of borrowers, and risk rating of loans. In addition to the review of credit quality through ongoing credit review processes, we construct a comprehensive allowance analysis for our loan portfolio at least quarterly. This analysis includes specific allowances for individual loans, general allowance for loan pools that factor in our historical loan loss experience, loan portfolio growth and trends, economic conditions, and unallocated allowances predicated upon both internal and external factors.

The allowance for loan losses was $110.0 million or 6.09% of outstanding loans as of March 31, 2011 compared with $157.3 million or 8.03% of outstanding loans as of December 31, 2010. Pooled loan allocations decreased to $51.2 million at March 31, 2011 from $58.6 million at December 31, 2010. Allowance coverage for the non-impaired portfolio is determined using a methodology that incorporates historical loss rates and risk ratings by loan category. Loss rates are based on a three-year weighted average with recent period loss rates weighted more heavily. We then apply an adjustment factor to each loss rate based on assessments of loss trends, collateral values, and economic and business influences impacting expected losses. Specific loan allocations decreased to $52.0 million at March 31, 2011 from $89.8 million at December 31, 2010. Specific loan allocations decreased due to the $69.2 million in problem loans charged off during the quarter. Unallocated allowances decreased to $6.8 million at March 31, 2011 from $8.8 million at December 31, 2010. The following table provides a breakdown of the allowance for loan losses and other related information (in thousands) at March 31, 2011 and December 31, 2010.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


	March 31, 2011			December 31, 2010
Allowance for loan losses:
Pooled component	$	51,209		$	58,623
Specific component		51,954			89,838
Unallocated component		6,827			8,792


Total	$	109,990		$	157,253


Impaired loans	$	303,222		$	356,876
Non-impaired loans		1,503,225			1,601,891

Total loans	$	1,806,447		$	1,958,767


Pooled component as % of non-impaired loans		3.41	%		3.66	%
Specific component as % of impaired loans		17.13	%		25.17	%

Allowance as % of loans		6.09	%		8.03	%
Allowance as % of nonaccrual loans		55.42	%		61.43	%

The specific allowance for loan losses necessary for impaired loans is based on a loan-by-loan analysis and varies between impaired loans largely due to the level of collateral. Additionally, pooled loan allocations vary depending on a number of assumptions and trends. As a result, the ratio of allowance for loan losses to nonaccrual loans is not sufficient for measuring the adequacy of the allowance for loan losses. The following table provides additional ratios that measure our allowance for loan losses at March 31, 2011 and December 31, 2010.

Credit losses are an inherent part of our business, and although we believe the methodologies for determining the allowance for loan losses and the current level of allowance are adequate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment. Additional provisions for such losses, if necessary, would negatively impact earnings. As a result, our earnings could be adversely affected if our estimate of an adequate allowance is inaccurate.

The following ratios are used by management in assessing the adequacy of the allowance for loan losses.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


	March 31, 2011			December 31, 2010

Non-performing loans for which full loss has been charged off to total loans		2.52	%		2.60	%

Non-performing loans for which full loss has been charged off to non-performing loans		22.99	%		19.91	%

Charge off rate for non-performing loans for which the full loss has been charged off		58.82	%		48.08	%

Coverage ratio net of non-performing loans for which the full loss has been charged off		72.24	%		76.70	%

Total allowance divided by total loans less non-performing loans for which the full loss has been charged off		6.25	%		8.24	%

Allowance for individually impaired loans divided by impaired loans for which an allowance has been provided		24.21	%		36.00	%

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms. Subsequent recoveries, if any, are credited to the allowance. Impairment is evaluated in the aggregate for smaller balance loans of similar nature and on an individual loan basis for other loans. If a loan is considered impaired, it is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Total impaired loans were $303.2 million at March 31, 2011, a decrease of $53.7 million or 15% from December 31, 2010. Of these loans, $197.7 million were on nonaccrual status at March 31, 2011. Net charge-offs were $68.6 million for the three months ended March 31, 2011 as compared with $27.1 million for the three months ended December 31, 2010.

Non-Performing Loans. Non-performing loans consist of nonaccrual loans and loans 90 days past due and still accruing interest. As of March 31, 2011, there were $770 thousand in loans that were 90 days past due and still accruing interest; there were no loans 90 days past due and still accruing interest as of December 31, 2010. Total nonaccrual loans aggregated $198.5 million at March 31, 2011 as compared with $256.0 million at December 31, 2010. This decrease was accomplished with the net charge-offs of $68.6 million noted above. The following chart summarizes our nonaccrual loans by loan type as of March 31, 2011 and December 31, 2010 (in thousands).


	March 31, 2011		December 31, 2010
Commercial and Industrial	$	15,348	$	25,346
Construction		109,938		139,668
Real estate - commercial mortgage		38,523		52,535
Real estate - residential mortgage		34,093		37,151
Installment loans (to individuals)		576		1,292

Total nonaccrual loans	$	198,478	$	255,992

Deposits. Deposits are the primary source of funds for use in lending and general business purposes. Our balance sheet growth is largely determined by the availability of deposits in our markets and the prospects of profitably

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

utilizing the available deposits by increasing the loan or investment portfolios. Total deposits at March 31, 2011 decreased $149.2 million or 6% to $2.3 billion as compared with December 31, 2010. Total brokered deposits were $104.9 million or 5% of deposits at March 31, 2011, which was a decrease of $31.8 million from the total brokered deposits of $136.8 million or 6% of deposits at December 31, 2010. Pursuant to the Written Agreement, BOHR is prohibited from accepting any new brokered deposits. Interest-bearing demand deposits included $18.6 million brokered money market funds at March 31, 2011, which was $238 thousand lower than the $18.9 million balance of brokered money market funds outstanding at December 31, 2010. Brokered CDs represented $86.3 million, which was a decrease of $31.6 million over the $117.9 million of brokered CDs outstanding at December 31, 2010.

Changes in the deposit categories include a decrease of $676 thousand in noninterest-bearing demand deposits, a decrease of $78.9 million or 11% in interest-bearing demand deposits, and an increase of $2.3 million or 3% in savings accounts from December 31, 2010 to March 31, 2011. Total time deposits under $100 thousand decreased $23.0 million from $703.0 million at December 31, 2010 to $680.0 million at March 31, 2011. Time deposits over $100 thousand decreased $48.8 million from $701.3 million at December 31, 2010 to $652.5 million at March 31, 2011 primarily due to lower rates offered on certificates of deposits resulting in run-off as maturity dates were reached. Going forward, management intends to focus on core deposit growth as our primary source of funding.

Borrowings. We use short-term and long-term borrowings from various sources including the FHLB, funds purchased from correspondent banks, reverse repurchase accounts, and trust preferred securities. Our FHLB borrowings on March 31, 2011 were $212.6 million compared to $213.4 million at December 31, 2010.

Capital Resources. Total shareholders’ equity decreased $30.9 million or 16% to $159.9 million at March 31, 2011 compared to $190.8 million at December 31, 2010.

In January 2010, the Company exercised its right to defer all quarterly distributions on the trust preferred securities (in thousands) it assumed in connection with its merger with GFH (collectively, the “Trust Preferred Securities”), which are identified below.


	Amount (in thousands)		Interest Rate	Redeemable On Or After	Mandatory Redemption

Gateway Capital Statutory Trust I	$	8,000	LIBOR + 3.10%	September 17, 2008	September 17, 2033
Gateway Capital Statutory Trust II		7,000	LIBOR + 2.65%	July 17, 2009	June 17, 2034
Gateway Capital Statutory Trust III		15,000	LIBOR + 1.50%	May 30, 2011	May 30, 2036
Gateway Capital Statutory Trust IV		25,000	LIBOR + 1.55%	July 30, 2012	July 30, 2037

Interest payable under the Trust Preferred Securities continues to accrue during the deferral period and interest on the deferred interest also accrues, both of which must be paid at the end of the deferral period and totaled $1.7 million at March 31, 2011. Prior to the expiration of the deferral period, the Company has the right to further defer interest payments, provided that no deferral period, together with all prior deferrals, exceeds 20 consecutive quarters and that no event of default (as defined by the terms of the applicable Trust Preferred Securities) has occurred and is continuing at the time of the deferral. The Company was not in default with respect to the terms of the Trust Preferred Securities at the time the quarterly payments were deferred and such deferrals did not cause an event of default under the terms of the Trust Preferred Securities.

We are subject to regulatory risk-based capital guidelines that measure capital relative to risk-weighted assets and off-balance sheet financial instruments. Tier I capital is comprised of shareholders’ equity, net of unrealized gains or losses on available-for-sale securities, less intangible assets, while total risk-based capital adds certain debt instruments and qualifying allowances for loan losses. As of March 31, 2011, our consolidated regulatory capital ratios are Tier 1 Leverage Ratio of 6.34%, Tier 1 Risk-Based Capital Ratio of 9.43%, and Total Risk-Based Capital of 10.73%. As of March 31, 2011, we meet the minimum capital requirements under the applicable regulations. In addition, BOHR and Shore are considered to be “well capitalized” under the regulatory framework for prompt corrective action.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet our customers’ financing needs. For more information on our off-balance sheet arrangements, see Note 15, Financial Instruments with Off-Balance-Sheet Risk, of the Notes to Consolidated Financial Statements contained in the 2010 Form 10-K.

Contractual Obligations. We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products and services from unaffiliated parties. Our contractual obligations consist of time deposits, borrowings, and operating lease obligations. There have not been any significant changes in our contractual obligations from those disclosed in the 2010 Form 10-K.

ANALYSIS OF RESULTS OF OPERATIONS

Overview. Our net loss available to common shareholders for the three months ended March 31, 2011 was $31.7 million as compared with a net loss available to common shareholders of $40.5 million for the three months ended March 31, 2010. The loss available to common shareholders for the three months ended March 31, 2011 was driven primarily by provision for loan losses expense of $21.3 million necessary to maintain the allowance for loan losses at a level necessary to cover expected losses inherent in the loan portfolio. Diluted loss per common share for the three months ended March 31, 2011 was $0.95, an improvement of $44.79 over the diluted loss per common share of $45.74 for the three months ended March 31, 2010. The large fluctuation in diluted earnings per share is due to the issuance of common shares in connection with the Company’s recapitalization in late 2010.

Net Interest Income. Net interest income, a major component of our earnings, is the difference between the income generated by interest-earning assets reduced by the cost of interest-bearing liabilities. Net interest income for the three months ended March 31, 2011 was $18.2 million, a decrease of $3.7 million from the three months ended March 31, 2010. The decrease in net interest income was primarily the result of a decrease in interest income from loans of $7.7 million partially offset by the decrease in interest expense on deposits of $3.2 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The net interest margin, which is calculated by expressing annualized net interest income as a percentage of average interest-earning assets, is an indicator of effectiveness in generating income from earning assets. Our net interest margin decreased to 2.98% for the three months ended March 31, 2011 from 3.39% during the first three months of 2010. The decline in net interest margin from prior periods is due primarily to increased levels of nonaccrual loans and an overall reduction in the amount of loans outstanding.

Our interest-earning assets consist of loans, investment securities, overnight funds sold and due from FRB, and interest-bearing deposits in other banks. Interest income on loans, including fees, decreased $7.7 million to $24.5 million for the three months ended March 31, 2011, as compared to the same time period during 2010. This decrease was predominantly a result of a decrease in average loan balance. Interest income on investment securities increased $701 thousand for the three months ended March 31, 2011 compared to the same time period during 2010. Interest income on interest-bearing deposits in other banks decreased $28 thousand for the three month period ended March 31, 2011 compared to the same time period during 2010. Interest income on overnight funds sold and due from FRB increased $130 thousand for the three months ended March 31, 2011 compared to the same time period during 2010.

Our interest-bearing liabilities consist of deposit accounts and borrowings. Interest expense on deposits decreased $3.2 million to $6.9 million for the three months ended March 31, 2011 compared to the same time period during 2010. This decrease resulted from a $199.4 million decrease in average interest-bearing deposits and a 45-basis point decrease in the average interest rate paid on deposits for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The decrease in average deposit rates resulted from repricing actions taken since the latter part of 2010. A reduction in the average rate paid on interest-bearing demand deposits to 0.69% for the first three months of 2011 from 1.61% for the first three months of 2010 contributed significantly toward the decrease in overall deposit rates. Interest expense on borrowings, which consisted of FHLB borrowings and other borrowings increased $17 thousand for the three months ended March 31, 2011 compared to the same time periods during 2010. The 19-basis point increase in the average interest rate paid on borrowings partially offset by the $14.0 million decrease in the three month average borrowings produced this result.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The table below represents the average interest-earning assets and average interest-bearing liabilities (in thousands), the average yields earned on such assets and rates paid on such liabilities, and the net interest margin for the three months ended March 31, 2011 and 2010.


	Three Months Ended March 31, 2011							Three Months Ended March 31, 2010							2011 Compared to 2010
	Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate			Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate			Interest Income/ Expense Variance			Variance Attributable to
	Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate			Average Balance		Annualized Interest Income/ Expense		Average Yield/ Rate			Interest Income/ Expense Variance			Rate			Volume
Assets:
Interest-earning assets
Loans	$	1,729,421	$	99,518		5.75	%	$	2,173,606	$	130,809		6.02	%	$	(31,291	)	$	(4,101	)	$	(27,190	)
Investment securities		366,543		9,808		2.68	%		206,203		6,964		3.38	%		2,844			(1,684	)		4,528
Interest-bearing deposits in other banks		1,392		5		0.39	%		48,178		117		0.24	%		(112	)		44			(156	)
Overnight funds sold and due from FRB		379,721		911		0.24	%		198,947		384		0.19	%		527			111			416

Total interest-earning assets		2,477,077		110,242		4.46	%		2,626,934		138,274		5.26	%		(28,032	)		(5,630	)		(22,402	)
Noninterest-earning assets		333,184							377,358

Total assets	$	2,810,261						$	3,004,292


Liabilities and Shareholders’ Equity:
Interest-bearing liabilities
Interest-bearing demand deposits	$	684,096	$	4,726		0.69	%	$	954,939	$	15,416		1.61	%		(10,690	)		(7,147	)		(3,543	)
Savings deposits		66,408		170		0.26	%		80,221		525		0.65	%		(355	)		(277	)		(78	)
Time deposits		1,369,796		23,080		1.68	%		1,284,574		25,095		1.95	%		(2,015	)		(3,605	)		1,590

Total interest-bearing deposits		2,120,300		27,976		1.32	%		2,319,734		41,036		1.77	%		(13,060	)		(11,029	)		(2,031	)
Borrowings		262,893		8,357		3.18	%		276,890		8,290		2.99	%		66			497			(431	)

Total interest-bearing liabilities		2,383,193		36,333		1.52	%		2,596,624		49,326		1.90	%		(12,994	)		(10,532	)		(2,462	)
Noninterest-bearing liabilities
Demand deposits		220,579							236,947
Other liabilities		22,725							21,082

Total noninterest-bearing liabilities		243,304							258,029

Total liabilities		2,626,497							2,854,653
Shareholders’ equity		183,764							189,639

Total liabilities and shareholders’ equity	$	2,810,261						$	3,044,292

Net interest income			$	73,909						$	88,948

Net interest spread						2.94	%						3.36	%
Net interest margin						2.98	%						3.39	%

Note: Interest income from loans included fees of $154 at March 31, 2011 and $206 at March 31, 2010, respectively. Average nonaccrual loans of $197,708 and $251,421 are excluded from average loans at March 31, 2011 and March 31, 2010, respectively. The change in interest due to both rate and volume has been allocated to variance attributable to rate and variance attributable to volume in proportion to the relationship for the absolute amounts of change in each.

Noninterest Income. For the quarter ended March 31, 2011, total noninterest income was $2.1 million, a decrease of $3.5 million or 62% as compared to the first quarter of 2010. Noninterest income comprised 7% of total revenue for the first three months of 2011 and 14% for the first three months of 2010. The following table provides a summary of noninterest income (in thousands) for the three months ended March 31, 2011 and 2010.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


	Three Months Ended March 31,
	2011			2010

Service charges on deposit accounts	$	1,446		$	1,665
Mortgage banking revenue		1,250			1,755
Gain on sale of investment securities		—			79
Gain on sale of premises and equipment		—			25
Losses on foreclosed real estate		(3,682	)		(738	)
Other-than-temporary impairment of securities		—			(44	)
Insurance revenue		1,153			1,320
Brokerage revenue		70			74
Income from bank-owned life insurance		481			400
Visa check card income		530			429
ATM surcharge fee		82			86
Rental income		229			36
Other		566			514

Total noninterest income	$	2,125		$	5,601

Service charges on deposit accounts decreased $219 thousand or 13% to $1.4 million for the first three months of 2011 compared to the same period in 2010 due to reduced overdraft activity along with a change in policy reducing the number of overdraft charges a customer can incur on any given day. Mortgage banking revenue, which is primarily the income associated with originating and selling first lien residential real estate loans, was $1.3 million in the three month period ended March 31, 2011 compared to $1.8 million in the prior year period. We generated no gains or losses on sales of investment securities during the first three months of 2011 compared to $79 thousand for comparative 2010. The deteriorating economy during the past few years caused losses on foreclosed real estate. Losses on foreclosed real estate for the first three months of 2011 were $3.7 million compared to $738 thousand for the first three months of 2010 and were included as a reduction to noninterest income.

Noninterest Expense. Noninterest expense represents our operating and overhead expenses. Total noninterest expense increased $9.7 million or 46% for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The efficiency ratio, calculated by dividing noninterest expense by the sum of net interest income and noninterest income excluding securities gains was 151% for the first three months of 2011 compared to 76% for the first three months of 2010. The following table provides a summary of total noninterest expense (in thousands) for the three months ended March 31, 2011 and 2010.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


	Three Months Ended March 31,
	2011		2010

Salaries and employee benefits	$	12,355	$	9,750
FDIC insurance		6,709		1,056
Occupancy		2,326		2,298
Professional fees and consultants		2,185		1,316
Problem loan and repossessed assets		1,416		613
Data processing		1,007		1,480
Equipment		806		1,091
Amortization of intangible assets		487		495
Bank franchise tax		484		510
Telephone and postage		419		391
Other		2,448		1,980

Total noninterest expense	$	30,642	$	20,980

Salaries and employee benefits expense in the first quarter of 2011 increased $2.6 million and was impacted by increases in mortgage banking personnel. FDIC insurance was $6.7 million for the three months ended March 31, 2011 as compared with $1.1 million for the same period in 2010; the first quarter of 2011 included a one-time adjustment of $5.4 million. Occupancy expense increased $28 thousand for the first three months of 2011 compared to the first three months of 2010. For the first three months of 2011, professional fees were $2.2 million compared to $1.3 million for comparative 2010. Professional fees increased primarily due to legal and consultant fees associated with loan collection activities. Problem loan and repossessed asset costs increased $803 thousand for the first three months of 2011 compared to the same period during 2010. Data processing expense decreased $473 thousand for the first three months of 2011 compared to the first three months of 2010 due to renegotiations on certain data processing contracts. Equipment expense decreased $285 thousand to $806 thousand for the three months ended March 31, 2011 as compared to the same period in 2010 due to a reduction in bank-owned vehicles and other cost reduction initiatives.

Income Tax Provision. Income tax expense for the first quarter of 2011 was $44 thousand. Management assesses the realizability of the deferred tax asset on a quarterly basis, considering both positive and negative evidence in determining whether it is more likely than not that some portion or all of the net deferred tax asset would not be realized. A valuation allowance for the entire net deferred tax asset has been established. Section 382 limitations related to the capital raised during the quarters ended September 30, 2010 and December 31, 2010 add further uncertainty to the realizability of the deferred tax assets in future periods.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management considers interest rate risk to be a significant market risk for the Company. Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company’s interest earning assets and interest bearing liabilities.

The primary goal of the Company’s asset/liability management strategy is to optimize net interest income while limiting exposure to fluctuations caused by changes in the interest rate environment. The Company’s ability to manage its interest rate risk depends generally on the Company’s ability to manage the maturities and re-pricing characteristics of its assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income.

The Company’s management, guided by the Asset/Liability Committee, determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors.

The primary method that the Company uses to quantify and manage interest rate risk is simulation analysis, which is used to model net interest income from assets and liabilities over a specified time period under various interest rate scenarios and balance sheet structures. This analysis measures the sensitivity of net interest income over a relatively short time horizon. Key assumptions in the simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances, and the behavior of loan and deposit customers in different rate environments.

The expected effect on net interest income for the twelve months following March 31, 2011 and December 31, 2010 due to an immediate change in interest rates is shown below. These estimates are dependent on material assumptions, such as those previously discussed.


	March 31, 2011						December 31, 2010
(in thousands)	Change in Net Interest Income						Change in Net Interest Income
	Amount			%			Amount		%
Change in Interest Rates:
+200 basis points	$	1,543			2.04	%	$	4,627		6.03	%
+100 basis points		939			1.24	%		1,775		2.31	%
-100 basis points		(2,184	)		(2.88	)%		1,022		1.33	%
-200 basis points		N/A			N/A			N/A		N/A

The above analysis suggests that we project an increase in net interest income assuming an immediate increase in interest rates. It should be noted, however, that the simulation analysis is based upon equivalent changes in interest rates for all categories of assets and liabilities. In normal operating conditions, interest rate changes rarely occur in such a uniform manner. Many factors affect the timing and magnitude of interest rate changes on financial instruments. In addition, management may deploy strategies that offset some of the impact of changes in interest rates. Consequently, variations should be expected from the projections resulting from the controlled conditions of the simulation analysis. Management maintains a simulation model where it is assumed that interest rate changes occur gradually, that rate increases for interest-bearing liabilities lag behind the rate increases of interest-earning assets, and that the level of deposit rate increases will be less than the level of rate increases for interest-earning assets.

HAMPTON ROADS BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

Item 4. Controls and Procedures

As of March 31, 2011, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

In addition, no change in its internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

ITEM 1A – RISK FACTORS

For information regarding factors that could affect the Company’s results of operations, financial condition, or liquidity, see the risk factors discussed in the Company’s 2010 Form 10-K. Except as disclosed below, there have been no material changes to the risk factors as previously disclosed in the 2010 Form 10-K.

Risks Related to our Business

We incurred significant losses in 2009 and 2010 and through the first quarter of 2011 and may continue to do so in the future, and we can make no assurances as to when we will be profitable.

Throughout 2009, 2010, and through the first quarter of 2011, economic conditions in the markets in which our borrowers operate continued to deteriorate and the levels of loan delinquencies and defaults that we experienced were substantially higher than historical levels and our net interest income has declined. Our loan customers continue to operate in an economically stressed environment.

As a result, our net loss available to common shareholders for the three months ended March 31, 2011 was $31.7 million or $0.95 per common diluted share compared to our net loss available to common shareholders for the three months ended March 31, 2010 of $40.5 million or $45.74 per common diluted share. The net loss for the three months ended March 31, 2011 was primarily attributable to a provision for loan losses expense of $21.3 million. Moreover, net interest income decreased $3.7 million for the three months ended March 31, 2011 as compared to the same period in 2010. In light of the current economic environment, significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may continue to incur significant credit costs and net losses throughout 2011, which would continue to adversely impact our financial condition and results of operations and the value of our Common Stock. We currently expect that we will not become profitable again on an annual basis until 2012, and we expect to incur a net loss for the 2011 fiscal year taken as a whole. Additional loan losses could cause us to incur future net losses and could adversely affect the price of, and market for, our Common Stock.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to our expenses that represents management’s best estimate of probable losses within our existing portfolio of loans. Our allowance for loan losses amounted to $110.0 million at March 31, 2011 as compared to $157.3 million at December 31, 2010. The level of the allowance reflects management’s estimates and judgments as to specific credit risks, evaluation of industry concentrations, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, and unidentified losses inherent in the current loan portfolio that have been increasing in light of recent economic conditions. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Any such increases in the allowance for loan losses may have a material adverse effect on our results of operations, financial condition, and the value of our Common Stock.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

BOHR is restricted from accepting new brokered deposits, and an inability to maintain our regulatory capital position could adversely affect our operations.

BOHR’s Written Agreement prohibits it from accepting any new brokered deposits, even though it was “well-capitalized” for regulatory purposes as of March 31, 2011. Because Shore is not included in the Written Agreement, it is not subject to these restrictions.

In addition, Section 29 of the Federal Deposit Insurance Act limits the use of brokered deposits by institutions that are less than “well-capitalized” and allows the Federal Deposit Insurance Corporation (the “FDIC”) to place restrictions on interest rates that institutions may pay. If BOHR or Shore is unable to remain “well-capitalized” for regulatory purposes it will be, among other restrictions, prohibited from paying rates in excess of 75 basis points above the national market average on deposits of comparable maturity. Effective January 1, 2010, financial institutions that are not “well-capitalized” are prohibited from paying yields for deposits in excess of 75 basis points above a new national average rate for deposits of comparable maturity, as calculated by the FDIC. If a restriction is placed on the rates that BOHR and Shore are able to pay on deposit accounts that negatively impacts their ability to compete for deposits in our market area, our banks may be unable to attract or maintain core deposits, and their liquidity and ability to support demand for loans could be adversely affected.

The formal investigation by the Securities and Exchange Commission may harm our business.

In April 2011, the Securities and Exchange Commission’s Division of Enforcement notified the Company that the Division is conducting a formal investigation into the Company’s provisions and allowances for loan losses and deferred tax asset valuation allowances contained in its annual and quarterly reports for fiscal years 2008 through 2010. The Company intends to cooperate fully with the Division and believes its provisions and allowances will be determined to be appropriate. However, we cannot predict the timing or eventual outcome of this investigation. This investigation could possibly result in penalties, sanctions, or a restatement of our previously issued financial statements.

Current and future increases in FDIC insurance premiums, including the FDIC special assessment imposed on all FDIC-insured institutions, will decrease our earnings. In addition, FDIC insurance assessments will likely increase from our prior inability to maintain a well-capitalized status, which would further decrease earnings.

The Emergency Economic Stabilization Act of 2008 (“EESA”) temporarily increased the limit on FDIC coverage to $250,000 for all accounts through December 31, 2013. The Dodd-Frank Act, signed by President Obama on July 21, 2010, permanently lifted the FDIC coverage limit to $250,000. The Dodd-Frank Act also revised the assessment methodology for funding the Deposit Insurance Fund, requiring that assessments be based on an institution’s total liabilities, not just deposit liabilities. In addition, in May of 2009, the FDIC announced that it had voted to levy a special assessment on insured institutions in order to facilitate the rebuilding of the Deposit Insurance Fund. The assessment is equal to five basis points of the Company’s total assets minus Tier 1 capital as of June 30, 2009. This represented a charge of approximately $1.4 million, which was recorded as a pre-tax charge during the second quarter of 2009. The FDIC has indicated that future special assessments are possible.

Even though BOHR was “well capitalized” at March 31, 2011, our FDIC insurance assessments for BOHR nonetheless may increase in the future due to a variety of factors. Any increases in FDIC insurance assessments would decrease our earnings.

We have entered into the Written Agreement with the Federal Reserve Bank of Richmond and the Bureau of Financial Institutions of the Virginia State Corporation Commission, which requires us to dedicate a significant amount of resources to complying with the agreement and may have a material adverse effect on our operations and the value of our securities.

Effective June 17, 2010, the Company and BOHR entered into the Written Agreement with the FRB and the Bureau of Financial Institutions. Shore is not a party to the Written Agreement.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

Under the terms of the Written Agreement, BOHR has agreed to develop and submit for approval within the time periods specified in the Written Agreement, written plans to:

•

strengthen board oversight of management and BOHR’s operations;

•

strengthen credit risk management policies;

•

improve BOHR’s position with respect to loans, relationships, or other assets in excess of $2.5 million that are now or in the future may become past due more than 90 days, are on BOHR’s problem loan list, or adversely classified in any report of examination of BOHR;

•

review and revise, as appropriate, current policy and maintain sound processes for determining, documenting, and recording an adequate allowance for loan and lease losses;

•

improve management of BOHR’s liquidity position and funds management policies;

•

provide contingency planning that accounts for adverse scenarios and identifies and quantifies available sources of liquidity for each scenario;

•

reduce BOHR’s reliance on brokered deposits; and

•

improve BOHR’s earnings and overall condition.

In addition, BOHR has agreed that it will:

•

not extend, renew, or restructure any credit that has been criticized by the FRB or the Bureau of Financial Institutions absent prior Board of Directors approval in accordance with the restrictions in the Written Agreement;

•

eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the FRB;

•

comply with legal and regulatory limitations on indemnification payments and severance payments; and

•

appoint a committee to monitor compliance with the terms of the Written Agreement.

In addition, the Company has agreed that it will:

•

not take any other form of payment representing a reduction in BOHR’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval;

•

take all necessary steps to correct certain technical violations of law and regulation cited by the FRB;

•

refrain from guaranteeing any debt without the prior written approval of the FRB and the Bureau of Financial Institutions; and

•

refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB or the Bureau of Financial Institutions.

Under the terms of the Written Agreement, the Company and BOHR have submitted for approval capital plans to maintain sufficient capital at the Company, on a consolidated basis, and at BOHR, on a stand-alone basis, and to refrain from declaring or paying dividends absent prior regulatory approval.

This description of the Written Agreement is qualified in its entirety by reference to the copy of the Written Agreement filed with the Company’s Current Report on Form 8-K, filed June 17, 2010. To date, the Company and BOHR have met all of the deadlines for taking actions required by the FRB and the Bureau of Financial Institutions under the terms of the Written Agreement. The Risk Committee was appointed to oversee the Company’s compliance with the terms of the agreement and has met each month to review compliance. Written plans have been submitted for strengthening board oversight, strengthening credit risk management practices, improving liquidity, reducing the reliance on brokered deposits, improving capital, and curing the technical violations of laws and regulations. The Company has also submitted its written policies and procedures for maintaining an adequate allowance for loan and lease losses and its plans for all foreclosed real estate and nonaccrual and delinquent loans in excess of $2.5 million. Additionally, the Company instituted the required review process for all classified loans. Previously, the Company charged off the assets

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

identified as loss from the previous examination. Moreover, the Company has raised $295.0 million in the closings of several related transactions in the third and fourth quarters of last year. The Company and BOHR were “well-capitalized” as of March 31, 2011. As a result, management believes the Company and BOHR are in full compliance with the terms of the Written Agreement.

We have had and may continue to have large numbers of problem loans and difficulties with our loan administration, which could increase our losses related to loans.

Our non-performing assets as a percentage of total assets decreased to 10% at March 31, 2011 from 11% at December 31, 2010. On March 31, 2010, 2% of our loans are 30 to 89 days delinquent and are treated as performing assets. Based on these delinquencies, we expect more loans to become non-performing. The administration of non-performing loans is an important function in attempting to mitigate any future losses related to our non-performing assets.

In the past, our management of non-performing loans was, at times, not as strong as we would prefer. In 2009, we hired an independent third party to review a significant portion of our loans. The independent third party discovered several issues with our loan management that we have since taken significant remedial steps to address. The following issues were identified: updated appraisals on problem loans and large loans secured by real estate were not always being obtained; better organized credit files were needed; additional resources were needed to manage problem loans; and the Company lacked well-defined internal workout policies and procedures.

A variety of initiatives were undertaken in 2009 to remediate the conditions noted above as well as other enhancements to our credit review and collection processes. Initiatives and procedures which augmented the credit administration function included acquisition and development loan reviews, interest reserve loan reviews, past due loan reviews, forecasting reviews, standard loan reviews, loans presented for approval and renewal, relationship reviews, and global cash flow analyses. We have improved the organization of our credit files and have made efforts to attain appraisal updates in a timelier manner. In addition to the internal review of credit quality, we engaged an independent credit consulting firm to conduct an analysis of our loan portfolio. We also increased staffing in credit administration and established and staffed a separate special assets function to manage problem assets.

Although we have made significant enhancements to our loan management processes to address these issues, we can give you no assurances that we will be able to successfully manage our problem loans, our loan administration, and origination process. If we are unable to do so in a timely manner, our loan losses could increase significantly and this could have a material adverse effect on our results of operations and the value of, or market for, our Common Stock.

Our commercial real estate and equity line lending may expose us to a greater risk of loss and hurt our earnings and profitability.

Our business strategy centers, in part, on offering commercial and equity line loans secured by real estate in order to generate interest income. These types of loans generally have higher yields and shorter maturities than traditional one-to-four family residential mortgage loans. At March 31, 2011, commercial and residential loans secured by real estate totaled $1.1 billion, which represented 61% of total loans. Such loans increase our credit risk profile relative to other financial institutions that have lower concentrations of commercial real estate and equity line loans.

Loans secured by commercial real estate properties are generally for larger amounts and involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on loans secured by these properties generally are dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy. While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.

Equity line loans typically involve a greater degree of risk than one-to-four family residential mortgage loans. Equity line lending allows a customer to access an amount up to their line of credit for the term specified in their agreement. At the expiration of the term of an equity line, a customer may have the entire principal balance outstanding as opposed to a one-to-four family residential mortgage loan where the principal is disbursed entirely at closing and amortizes throughout the term of the loan. We cannot predict when and to what extent our customers will access their equity lines. While we seek to minimize this risk in a variety of ways, including attempting to employ conservative underwriting criteria, there can be no assurance that these measures will protect against credit-related losses.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

A significant amount of our loan portfolio contains loans used to finance construction and land development and these types of loans subject our loan portfolio to a higher degree of credit risk.

Although we are no longer making new loans to finance construction and land development, a significant amount of our portfolio contains such loans. Construction financing typically involves a higher degree of credit risk than financing on improved, owner-occupied real estate. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction, the marketability of the property, and the bid price and estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment. When lending to builders, the cost of construction breakdown is provided by the builder, as well as supported by the appraisal. Although our underwriting criteria were designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will have safeguarded against material delinquencies and losses to our operations.

At March 31, 2011, we had loans of $395.2 million or 22% of total loans outstanding to finance construction and land development. Construction and land development loans are dependent on the successful completion of the projects they finance, however, in many cases such construction and development projects in our primary market areas are not being completed in a timely manner, if at all.

We are not paying dividends on our Common Stock and are currently prevented from doing so. The failure to resume paying dividends on our Common Stock may adversely affect us.

We historically paid cash dividends prior to the third quarter of 2009. During the third quarter of 2009, we suspended dividend payments on our Common Stock. We are prevented by our regulators from paying dividends until our financial position improves. In addition, the retained deficit of BOHR, our principal banking subsidiary, is currently $353.7 million. Absent permission from the Virginia State Corporation Commission, BOHR may pay dividends to us only to the extent of positive accumulated retained earnings. It is unlikely in the near term that we would be able to pay dividends if BOHR cannot pay dividends to us. As a result, there is no assurance if or when we will be able to resume paying cash dividends. Even if we are allowed by our regulators to resume paying dividends again, the Exchange Agreement provides that, until the earlier of December 31, 2011 or such time as the Treasury ceases to own any debt or equity securities of the Company, we must obtain the consent of the Treasury prior to declaring or paying any cash dividend of more than $0.006 per share of our Common Stock.

In addition, all dividends are declared and paid at the discretion of our Board of Directors and are dependent upon our liquidity, financial condition, results of operations, regulatory capital requirements, and such other factors as our Board of Directors may deem relevant. The ability of our banking subsidiaries to pay dividends to us is also limited by obligations to maintain sufficient capital and by other general restrictions on dividends that are applicable to our banking subsidiaries. If we do not satisfy these regulatory requirements, we are unable to pay dividends on our Common Stock.

Holders of our Common Stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. We are subject to formal regulatory and state law restrictions that do not permit us to declare or pay any dividend without the prior written approval of our banking regulators. Although we can seek to obtain a waiver of this prohibition, our regulators may choose not to grant such a waiver, and we would not expect to be granted a waiver or be released from this obligation until our financial performance and retained earnings improve significantly. Therefore, we may not be able to resume payments of dividends in the future.

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company announced an open ended program on August 13, 2003, by which management was authorized to repurchase an unlimited number of shares of the Company’s Common Stock in the open market and through privately negotiated transactions. There were no share repurchase transactions conducted during the first quarter of 2011.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – REMOVED AND RESERVED

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS


3.1		Amended and Restated Articles of Incorporation of Hampton Roads Bankshares, Inc.*

3.2		Bylaws of Hampton Roads Bankshares, Inc., as amended, incorporated by reference from the Registrant’s Form 8-K, filed September 24, 2009.

4.1		Specimen of Common Stock Certificate, incorporated by reference from the Registrant’s Form 10-Q for the quarter ended September 30, 2010.

4.2		Carlyle Contingent Warrant for purchase of Common Stock, incorporated by reference from the Registrant’s Form 10-Q for the quarter ended September 30, 2010.

4.3		Anchorage Contingent Warrant for purchase of Common Stock, incorporated by reference from the Registrant’s Form 10-Q for the quarter ended September 30, 2010.

4.4		Anchorage Standard Warrant for purchase of Common Stock, incorporated by reference from the Registrant’s Form 10-Q for the quarter ended September 30, 2010.

4.5		CapGen Contingent Warrant for purchase of Common Stock, incorporated by reference from the Registrant’s Form 10-Q for the quarter ended September 30, 2010.

4.6		CapGen Standard Warrant for purchase of Common Stock, incorporated by reference from the Registrant’s Form 10-Q for the quarter ended September 30, 2010.

4.7		Amended and Restated Warrant for Purchase of Shares of Common Stock issued to the United States Department of the Treasury, incorporated by reference from the Registrant’s Form 8-K, filed August 18, 2010.

4.8		Letter Agreement, dated December 31, 2008, by and between Hampton Roads Bankshares, Inc. and the United States Department of the Treasury, incorporated by reference from the Registrant’s Form 8-K, filed January 5, 2009.

4.9		Exchange Agreement, dated August 12, 2010, by and between Hampton Roads Bankshares, Inc. and the United States Department of the Treasury, incorporated by reference from the Registrant’s Form 8-K, filed August 18, 2010.

31.1		The Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*

HAMPTON ROADS BANKSHARES, INC.

PART II. OTHER INFORMATION


31.2		The Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.*

32.1		Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*

*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		HAMPTON ROADS BANKSHARES, INC.
		(Registrant)

DATE: May 16, 2011		/s/ Stephen P. Theobald
		Stephen P. Theobald
		Chief Financial Officer

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